**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      DC


20549





-----------------





**FORM
      10-QSB**





-----------------





/X/  QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
      THE
      QUARTERLY PERIOD ENDED September 30, 2007





/
      /  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





Commission
      file number: 001-32134





**Z
      TRIM HOLDINGS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)





**ILLINOIS**
              (State
                or Other Jurisdiction ofIncorporation
                or Organization)
            **36-4197173**
              (I.R.S.
                EmployerIdentification
                No.)





1011
      CAMPUS DRIVE, MUNDELEIN, ILLINOIS 60060


(Address
      of Principal Executive Offices)





(847)
      549-6002


(Issuer's
      Telephone Number, Including Area Code)





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes /X/ No / /





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes / / No /X/





The
      registrant has a single class of common stock, par value $.00005 per share,
      of
      which there were 72,056,375 shares issued and outstanding as of November 12,
      2007.





Transitional
      Small Business Disclosure Format (Alternative 2): Yes / / No /X/





1


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





See
      Consolidated Financial Statements beginning on page F-1.





**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





The
      following discussion is intended to assist in understanding the financial
      condition and results of operations of Z Trim Holdings, Inc. You should read
      the
      following discussion along with our financial statements and related notes
      included in this Form 10-QSB. The following discussion contains forward-looking
      statements that are subject to risks, uncertainties and assumptions. Our actual
      results, performance and achievements in 2007 and beyond may differ materially
      from those expressed in, or implied by, these forward looking
      statements.  See “Cautionary Statement Regarding Forward-Looking
      Information” below.





**Overview**





Z
      Trim
      Holdings, Inc. is an emerging growth company focused on the production,
      marketing and distribution of functional food ingredients and formulated foods
      for both domestic and international markets. Z Trim is a USDA-developed,
      all-natural, zero calorie functional food ingredient made from healthy dietary
      fiber. The Company has an extensive intellectual property portfolio, highlighted
      by an exclusive license from the USDA to make, use and sell Z Trim both
      domestically and internationally.  Currently, corn and oats are used
      to make Z Trim, but it can be produced from virtually any other agricultural
      product.  Current Z Trim products include gel and powder used to
      replace portions of fat, gums, starches and carbohydrates in foods, and as
      a
      fiber ingredient for the nutraceutical industry.  The Company’s core
      product portfolio of wellness foods and dietary fiber food ingredients includes
      corn Z Trim, non-GMO oat Z Trim, and functional emulsions and gels.  Z
      Trim is now being used by manufacturers, restaurants, schools, and consumers
      on
      5 continents to replace as much as 80% of the fat and calories in foods without
      changing taste, texture, appearance or digestive properties in baked goods,
      dairy products, snacks, deserts, sauces, dressings, processed meats and many
      other foods.





Z
      Trim is
      an all natural functional food ingredient made from plant fiber and comprises
      essentially an amorphous cellulose gel. Produced by a proprietary process that
      converts crude fiber grain components into cereal hydro-colloidal compositions,
      Z Trim is rich in soluble and insoluble fiber, devoid of fat and calories,
      neutral in taste and totally compatible in texture with foods in which it is
      used. In concrete terms, we believe this patented, proven ingredient system
      can
      significantly improve the nutritional profile of foods without compromising
      the
      taste delivery and mouth-feel properties of full-fat products that are critical
      to the brands of every major food company.





For  decades,  food
      manufacturers  have  taken  steps to
      make  foods  with fewer calories  for
      the  dieting  consumer.  They have been able to
      replace sugar and other sweeteners with modest success but have had little
      success replacing fat, usually creating products with poor taste and even worse
      textures. Sugar replacements such as saccharin, NutraSweet® and Splenda® can be
      found everywhere and have made their way into food products such as soft drinks,
      snacks, desserts, etc.  We believe that Z Trim, as a fat replacement,
      has the potential to become as commonplace as sugar substitutes, and will do
      this while maintaining the original taste and mouth feel of all foods in which
      it is used.





After
      years of development, Z Trim is now commercialized. The Company currently
      manufactures and markets Z Trim as a competitive ingredient that improves the
      food industry's ability to deliver on its promises of healthier foods. The
      Company's primary goal is establishing Z Trim as an important ingredient in
      revolutionizing the food industry.  The Company is developing its
      market through (i) direct sales to major food manufacturers, as well as several
      small and mid size companies, (ii) direct sales to the consumer, and (iii)
      direct sales to large food institutions such as those that supply to
      restaurants, hospitals, schools and cafeterias. We have an aggressive plan
      to
      educate both the food industry and consumers about the uses and benefits of
      Z
      Trim products, and we continue to develop additional products in partnership
      with our customers to service multiple markets.






2





We
      have
      four operating subsidiaries: FiberGel Technologies, Inc., thebraveway.com,
      Inc.,
      operating as The Brave Way Training Systems, On-Line Bedding Corp., and Z-Amaize
      Technologies, Inc., and holds exclusive licenses to the Nutrition Analysis
      Tool
      website, http://nat.crgq.com, Mini-Raman Lidar System, and ThraxVac
      technology.  The Company plans to dissolve thebraveway.com, Inc.,
      Z-Amaize Technologies, Inc., and On-Line Bedding Corp. by the end of this
      year.





**Recent
      Material Developments**





*Resignation
      of Former CEO and Chairman*





On
      August
      20, 2007, Gregory J. Halpern resigned his positions of Chief Executive Officer
      and Director of the Company, effective immediately.  The Board of
      Directors forfeited Mr. Halpern’s stock options under the Company’s 2004 Equity
      Incentive Plan.  Mr. Halpern held options to purchase 2,848,182 shares
      as of August 20, 2007.





In
      connection with Mr. Halpern’s resignation, the Company and Mr. Halpern entered
      into a Resignation Agreement and Release dated August 20, 2007.  On
      August 31, the Company announced that Mr. Halpern exercised his right to revoke
      the Resignation Agreement and Release.  Under the agreement, Mr.
      Halpern would have received severance pay equal to three months' salary plus
      unused vacation and would have received health insurance benefits for a period
      of six months. In addition, under the agreement the Company would have received
      a release of claims from Mr. Halpern. Mr. Halpern's revocation of the agreement
      does not affect his prior resignation as an officer and director of the Company
      and does not affect the Board of Directors' previous forfeiture of Mr. Halpern's
      stock options under the Company's 2004 Equity Incentive Plan.





The
      Board
      has taken steps to strengthen the Company with the implementation of several
      new
      policies, the addition of a number of employees in key areas, and several new
      board members and nominees with industry ties and experience.  The
      Board has also appointed Steve Cohen to run the Company going
      forward.  Implementing new policies and strengthening the Board and
      the staff are important for the Company’s growth; and by adding additional
      personnel to the sales, marketing, financial, and production areas of the
      Company, the Board has taken strong steps designed to improve the Company’s
      short- and long-term future.





*Board
      of Directors and Bylaws Changes.*





On
      November 9, 2007, the Board of Directors accepted David Lansky’s resignation
      from the Board.  The Board appointed Michael Donahue to fill the
      vacancy created by Mr. Lansky’s departure, effective November 14,
      2007.  In connection with his service on the Board, Mr. Donahue will
      receive an option under the Company's 2004 Stock Equity Plan to purchase 100,000
      shares of the Company's common stock with an exercise price equal to the market
      price of the Company's common stock as of the date of Mr. Donahue’s acceptance
      of his appointment.





Michael
      Donahue is recognized around the world for his ability to change the fundamental
      way companies project their “story” under ever-evolving global business and
      market dynamics.  During his twenty plus year career Mr. Donahue has
      been a trusted advisor to boards and CEOs of Fortune 500 companies requiring
      the
      need to build credibility and trust among a diverse group of constituents,
      employees, customers, shareholders, the media, and the public. In 2006, Mr.
      Donahue established a multidimensional communications, marketing and issue
      management firm.  From 1987 to 2006, Mr. Donahue worked for McDonalds
      Corporation.  During the first ten years of his career with
      McDonald’s, Mr. Donahue served in increasingly responsible positions to become
      an officer and senior executive as Vice President of
      Communications.  Mr. Donahue brought clear vision to the office of the
      President and CEO and aligned cross-functional disciplines from the executive
      suite to the field.  His actions were critical to establishing new
      brand relevance and consumer loyalty, which resulted in one of the most
      significant turnarounds in recent corporate history, i.e. from the first
      quarterly loss in thirty years to record breaking sales. Before joining
      McDonald’s, Mr. Donahue spent five years as a Manager/Director with the Illinois
      Retail Merchants Association, National Federation of Independent Business and
      3M
      Corporation where he created favorable environments for small businesses to
      conduct business with minimal regulatory restriction. He then transitioned
      into
      public office to assist the incumbent Governor to address small business
      concerns as Deputy Director for the State of Illinois Commerce
      Department.





3






On
      November 1, 2007, the Company announced that the Company’s board of directors
      amended the Company’s bylaws to include a procedure for nomination of candidates
      to the board of directors.





On
      November 14, 2007, the Company’s board of directors amended the Company’s bylaws
      to change the number of seats on the Board from eight to seven.  All
      seven seats will be open for election at the Company’s annual meeting of
      shareholders next month.





*Change
      of Auditors*





On
      November 16, 2007, the Company announced that it has replaced Spector and Wong
      LLP with Blackman Kallick Bartelstein LLP as its auditors.





*Internal
      Investigation and Status with Respect to Amex Listing
      Requirements*


Background. On
        August 17, 2007, we received a deficiency letter from the American Stock
        Exchange (“Amex”) notifying us that the staff of the Amex had determined we were
        not in compliance with certain of Amex’ continued listing
        standards.  The deficiencies (which are described in our Current
        Report on Form 8-K filed August 23, 2007) included failure to report Section
        16(a) filing delinquencies, failure of the board to subject a related party
        transaction to review by the Audit Committee, granting stock options in a
        manner
        contrary to our stock option plans, failure to properly account for stock
        option
        grants with exercise prices below fair market value on the date of grant,
        failure to provide certain information to Amex, and allowing internal control
        weaknesses to exist.
 
 In
        response to the deficiency letter, we prepared and submitted to Amex a
        compliance plan outlining our proposal for regaining compliance with Amex’
continued listing standards and addressing the matters contained in the
        deficiency letter.  The compliance plan was accepted by Amex on
        November 2, 2007 (as reported in our Current Report on Form 8-K filed November
        5, 2007).
 
 Internal
        Investigation. Pursuant
        to the compliance plan, we conducted an internal investigation relating to
        the
        primary issues of concern identified by Amex, principally including equity
        accounting and the related control environment.  We engaged the
        independent accounting firm of Blackman Kallick Bartelstein LLP (“Blackman”) to
        perform certain procedures to assist us with our internal
        investigation.  The objective of Blackman’s engagement was to help us
        assess the financial reporting figures, processes, and internal controls
        related
        to our equity transactions for the period January 1, 2002 through June 30,
        2007,
        and to make specific recommendations to strengthen the reporting and control
        environment.  Their procedures consisted principally of obtaining an
        understanding of the equity process at Z Trim, by inquiry, observation, testing,
        and reperformance, in an effort to assist us with our:
 
 §
              review
                  and reconciliation of our corporate records, minutes, transfer
                  agent
                  records, public disclosures, and accounting related to stock options,
                  warrants, and common stock;
 §
              analysis
                  of significant accounting policies and procedures surrounding equity
                  transactions;
 §
              determination
                  of whether any stock options have not been issued in accordance
                  with our
                  stock option plans;
 §
              review
                  of option pricing methodology;
 §
              review
                  of all minutes illustrating shareholder approval of equity
                  issuances;
 §
              review
                  of stock option certificates issued to
                  individuals;
 §
              determination
                  of our adherence to filing requirements related to equity
                  transactions;
 §
              consideration
                  of our quantitative and qualitative analysis of the findings outlined
                  below and of our historical financial statements to make determinations
                  as
                  to whether equity transactions were presented in accordance with
                  accounting principles generally accepted in the United States of
                  America
                  (USGAAP) and whether any of our Securities and Exchange Commission
                  filings
                  or financial statements should be amended or
                  restated;
 §
              consideration
                  of best practices for us with respect to equity transactions and
                  related
                  financial reporting; and
 §
              review
                  of our internal controls surrounding equity transactions and the
                  related
                  financial reporting process.
  4
  Issues
        and Findings. Blackman
        has completed its engagement and has identified the following significant
        issues:
 
 §
              During
                  the 5-1/2 year review period, we made a total of 191 stock option
                  grants
                  covering an aggregate of 15,179,087 shares without documentation
                  of
                  approval of those grants in the Board
                  minutes.
 
 §
              During
                  the 5-1/2 year review period, our Board minutes reflect approval,
                  but
                  after the date of grant, of 70 stock option grants covering an
                  aggregate
                  of 12,980,000 shares.
 
 §
              During
                  the period 2004 through 2007, we issued a total of 7 stock option
                  grants
                  covering 736,337 shares where the exercise price was below the
                  fair market
                  value of our common stock on the date of grant.   As a
                  result, none of those grants are eligible for tax treatment as
                  incentive
                  stock options.
 
 §
              During
                  the period 2002 through 2007, we issued a total of 21 stock option
                  grants
                  covering 3,684,000 shares where the exercise price was below 110%
                  of the
                  fair market value of our common stock on the date of grant and
                  the
                  recipient was the beneficial owner of 10% or more of our outstanding
                  equity.   As a result, none of those grants are eligible
                  for tax treatment as incentive stock
                  options.
 
 §
              In
                  each of 2002 and 2004 our option grants to a single recipient in
                  a
                  calendar year exceeded 1 million shares by an aggregate of 910,000
                  shares
                  over both years.  As a result, the grants that exceed the 1
                  million-share threshold are not eligible for tax treatment as incentive
                  stock options.  In addition, the grants that exceed the 1
                  million-share threshold are not allowed under our stock incentive
                  plan.
 
 §
              Our
                  officers, directors and 10% shareholders failed to file (or filed
                  late)
                  certain Section 16(a) reports (Forms 3, 4 and 5).  With respect
                  to current officers and directors, a total of 24 such delinquent
                  filings
                  occurred with respect to a total of 34 transactions during the
                  January 1,
                  2002 through June 30, 2007 review
                  period.
 
 §
              Between
                  March 2004 and June 2007 we issued 5,642,435 shares of common stock
                  and
                  warrants covering 1,939,507 shares of common stock without the
                  common
                  stock (or the shares underlying the warrants) being listed with
                  Amex.  Of those shares, we applied for listing, but were denied,
                  with respect to 4,000,000 shares, we exceeded our approval with
                  respect to
                  an equity raise by 180,852 shares and warrants to purchase an additional
                  824,507 shares, and we never applied for listing with respect to
                  the
                  balance of 1,461,583 shares and warrants for an additional 1,115,000
                  shares.
  5
  §
              Until
                  April of 2007 we had no formal equity policies and procedures,
                  including
                  with respect to options and
                  warrants.
 
 §
              There
                  is no formal management review and approval of quarterly reconciliations,
                  related equity journal entries, or Black-Scholes-Merton assumptions
                  and
                  calculations.
 
 §
              Access
                  to key spreadsheets is not
                  controlled.
 
 Blackman
        also made the following findings:
 
 §
              Our
                  overall accounting for stock options generally has been appropriate
                  since
                  January 1, 2002.  Blackman did note the following variances,
                  which we determined not to be material:  Total variances of
                  approximately $75,000 should have been recorded or disclosed for
                  the
                  period from January 1, 2002 through June 30, 2007.  Of this
                  amount, $57,000 relates to the period from January 1, 2002 through
                  December 31, 2005, which amounts should have been disclosed in
                  a footnote
                  as pro forma compensation expense.  The remaining $18,000 should
                  have been recorded as expenses for the period from January 1, 2006
                  through
                  June 30, 2007.
 
 §
              Based
                  on a review of our quarterly and year-end filings regarding equity
                  transactions, except for the Shemesh and Tobian transaction requiring
                  restatement as described in our Current Report on Form 8-K filed
                  November
                  2, 2007, no material discrepancies came to Blackman’s attention that would
                  lead Blackman to recommend the restatement of those
                  filings.
 
 §
              Our
                  overall accounting for warrants generally has been appropriate
                  since
                  January 1, 2002.
 
 Company
        Assessment. Our
        management team and Audit Committee have completed the internal investigation
        and have reviewed Blackman’s report of its findings.  We agree with
        Blackman’s findings and our assessment of our internal investigation includes
        the following conclusions:
 
 §
              We
                  have the following control deficiencies that constitute material
                  weaknesses in our internal control over financial
                  reporting:
 
 o
              account
                  reconciliations over equity transactions were not always properly
                  and
                  timely performed, and the reconciliations and their supporting
                  documentation were not consistently reviewed for completeness,
                  accuracy,
                  and timely resolution of reconciling items;
                  and
 
 o
              we
                  did not design and maintain effective controls to ensure the completeness,
                  accuracy, and timeliness of the recording and reporting of equity
                  transactions.
  6
 
 §
              We
                  must strengthen our policies and procedures with respect to financial
                  reporting, equity transactions, related party transaction monitoring,
                  spreadsheet controls, human resources and information
                  technology.
 
 §
              We
                  must more closely monitor Section 16(a) reporting persons to encourage
                  their compliance with reporting obligations and must more carefully
                  disclose any known failures to so
                  file.
 
 §
              We
                  must be more cognizant of the parameters of our stock option plan
                  and
                  either grant awards pursuant to the plan within the plan’s parameters, or
                  purposefully outside the plan (if at
                  all).
 
 §
              We
                  must refrain from issuing stock or granting warrants for which
                  no prior
                  listing with Amex has been
                  obtained.
 
 Remedial
        Actions. Our
        management, under new leadership since August of this year, immediately
        recognized that we had control and process deficiencies and began taking
        remedial action even before the internal investigation was
        commenced.  We have been actively engaged in the planning for, and
        implementation of, remediation efforts to address the material weaknesses
        and
        other issues arising from our internal investigation. These remediation efforts,
        outlined below, are intended both to address the identified issues and enhance
        our overall financial control and disclosure environment.
 
 Our
        new
        leadership team is committed to achieving and maintaining a strong control
        environment, high ethical standards, and financial reporting integrity. This
        commitment is accompanied by a renewed management focus on decision-making
        and
        processes that are intended to achieve maximum shareholder value over the
        long-term.
 
 We
        will
        continue our efforts to establish or modify specific processes and controls
        to
        provide reasonable assurance with respect to the accuracy and integrity of
        accounting entries and the appropriate documentation, review, and approval
        of
        those entries. These efforts include implementation and clarification of
        specific accounting and finance policies, and enhancing the development,
        communication, and monitoring of processes and controls to ensure that
        appropriate account reconciliations are performed, documented, and reviewed
        as
        part of standardized procedures.
 
 Some
        of
        the specific remedial actions our new management team has completed or will
        pursue include the following:
 §
                We
                    have implemented equity control policies and will seek to strengthen
                    those
                    policies.
 7
 §
                We
                    have appointed a new independent director to our board and plan
                    to
                    nominate additional independent directors this
                    year.
 §
              We
                  have engaged new independent auditors (see Item 4.01 of this
                  report).
 
 §
              We
                  have invested in the implementation of additional and enhanced
                  information
                  technology systems commensurate with the needs of our business
                  and our
                  financial reporting requirements and have engaged an independent
                  firm to
                  advise us in this regard.
 
 §
              We
                  have initiated a number of changes to our human resources policies
                  and
                  have engaged an independent firm to audit our human resources
                  functions.
 
 §
              We
                  have engaged a separate accounting firm to help us prepare for
                  compliance
                  with our upcoming Sarbanes-Oxley Section 404 compliance
                  requirements.
 
 §
              We
                  will apply (or reapply, as the case may be) with Amex to list the
                  shares
                  of common stock (and stock underlying warrants) issued by us without
                  current Amex approval.
 
 §
              We
                  have treated stock option grants that do not meet the criteria
                  for
                  incentive stock options as nonqualified stock options, and will
                  comply
                  with the associated tax reporting requirements.  We intend to
                  amend our 2004 tax return to properly record approximately $5 million
                  of
                  tax benefit from the exercise of nonqualified stock options in
                  that
                  year.  There is no journal entry required for financial
                  statement purposes until the company takes advantage of this benefit
                  by
                  offsetting taxable income.
 
 The
        Audit
        Committee has directed management to develop a detailed plan and timetable
        for
        the implementation of the foregoing remedial measures no later than December
        17,
        2007, with an expectation of achieving an earlier completion date. In addition,
        under the direction of the Audit Committee, management will continue to review
        and make necessary changes to the overall design of our internal control
        environment, as well as policies and procedures to improve the overall
        effectiveness of internal control over financial reporting.
 
 We
        believe the measures described above will remediate the material weaknesses
        we
        have identified and strengthen our internal control over financial reporting.
        We
        are committed to continuing to improve our internal control processes and
        to
        diligently review our financial reporting controls and procedures. As we
        continue to evaluate and work to improve our internal control over financial
        reporting, we may determine to take additional measures to address control
        deficiencies or determine to modify, or in appropriate circumstances not
        to
        complete, certain of the remediation measures described above.
 
 Risks
        of Non-Compliance.We
        continue to be non-compliant with Amex’ continued listing standards and are
        subject to periodic review by Amex regarding our compliance plan and are
        required to provide Amex with periodic updates in connection with the compliance
        plan. Failure to make progress consistent with the compliance plan or to
        regain
        compliance with the continued listing standards by December 17, 2007 will
        likely
        result in Amex initiating delisting proceedings with respect to our common
        stock.
  8
  *Restatements*





On
      October 31, 2007, the Company determined that its financial statements for
      the
      quarters ended March 31, 2007 and June 30, 2007 should no longer be relied
      upon
      because of accounting errors in those financial statements relating to a
      specific equity transaction.





Background.  On
      November 22, 2004, the Company entered into a two-year engagement with David
      Shemesh and Mordechai Tobian for investor relations services in consideration
      of
      2,250,000 shares of restricted common stock of the Company (the "Shemesh/Tobian
      Shares") and a warrant to purchase 275,000 shares of restricted common stock
      at
      $.80 per share through November 21, 2007.  Based on a closing price of
      the Company's common stock of $.79 on November 22, 2004, the Company recorded
      paid-in-capital of $1,777,500 as of that date and began to recognize investor
      relation expenses on a quarterly basis over the life of the two-year
      contract.





On
      August
      24, 2005, the Company took the position that Shemesh and Tobian had failed
      to
      perform as agreed and the Company rescinded the contract. Simultaneously, the
      Company placed a stop order on the Shemesh/Tobian Shares. Through that date,
      the
      Company had recognized $765,324.75 of expense relating to the contract.
      Accordingly, at September 30, 2005 the Company wrote off the remaining
      $1,012,175.25 against paid-in-capital.





Shemesh
      and Tobian disputed the Company's basis for rescinding the contract and because
      they were referred to the Company by Farhad Zaghi, the Company's purported
      rescission became an issue in the Company's ongoing litigation with Zaghi and
      his affiliates. In order to eliminate one of the issues of contention between
      the parties and facilitate further settlement negotiations with Zaghi, on March
      9, 2007, the Company released the stop order on the Shemesh/Tobian Shares and
      allowed the shares to be traded.  Because the Company previously had
      recorded a write-off against paid-in-capital associated with the Shemesh/Tobian
      Shares, upon lifting the stop order the Company should have re-expensed the
      Shemesh/Tobian Shares.





Impact
      of Restatements.  The March 31, 2007 consolidated financial
      statements have been restated to account for the shares released from
      restrictions on March 9, 2007. The Company recognized an expense of $2,182,175
      related to the transaction. As a result of this correction, net loss for the
      three months ended March 31, 2007 has increased to $3,906,811 from $1,724,636,
      and net loss per share increased to $0.06 from $0.03. The June 30, 2007
      consolidated financial statements have been restated to account for the shares
      released from restrictions on March 9, 2007. The Company recognized an expense
      of $2,182,175 related to the transaction. As a result of this correction, net
      loss for the six months ended June 31, 2007 has increased to $6,392,498 from
      $4,210,323, and net loss per share increased to $0.09 from
      $0.06.  There was no change for the three months ended June 30,
      2007.






9





*Sales
      and Operational Developments*





On
      October 5, the Company announced that it has received an order from the food
      service operation of the Flagler County Public Schools in Florida. The
      transaction activates Z Trim's vendor partnership with the P.O.W.E.R. Buying
      Group (Purchasing Organization with Educational Results), a Florida buying
      consortium that consists of 38 county school districts, totaling over 900
      schools and serving over 800,000 meals per school day.  In addition, Z
      Trim will be assisting both students and district food service administration
      for Flagler County Public Schools in planning the school system's food service
      menu to meet USDA nutritional requirements. In the United States, schools are
      currently serving over 125,000 meals a day containing Z Trim to replace fat
      and
      calories in dressings, mayonnaise, wet salads and baked goods. Based upon the
      existing success Z Trim is having with student meal programs, we expect these
      numbers to continue to increase.





In
      October, the Company’s management decided to no longer manufacture and sell the
      Company’s appetite control capsule product.  The Company is in
      discussions with companies in the nutraceutical industry to expand Z Trim’s
      reach in the dietary supplement market.





On
      September 17, the Company announced recent sales of Z Trim products to Ball
      State University and Ohio University, signaling the launch of Z Trim Holdings,
      Inc. into the college and university food service sub-sector.  The
      purchase of Z Trim's Mayo Spread by the food service operations at Ball State
      University in Muncie, Indiana, as well sales of the Z Trim gel natural specialty
      fiber food ingredient direct from Z Trim to Ohio University in Athens, Ohio,
      indicate a food service expansion for Z Trim Holdings beyond the national news
      stories that broke earlier this year when K-12 school cafeterias began using
      Z
      Trim as a solution that could satisfy both the taste and lower fat profiles
      sought by dietitians and food service directors in the USDA's school meals
      program.





On
      September 12, the Company announced that Jon Dickl, an award-winning specialist
      in school and general food service, nutrition, management, and marketing, joined
      Z Trim Holdings, Inc.  Mr. Dickl, a credentialed School Nutrition
      Specialist, served as the Director of the School Way Cafe food service network
      for the Volusia County Schools in Florida, where he oversaw almost 70 school
      food service operations and managed all facets of the operation including
      planning, operations, innovation strategies and marketing of the school meals.
      The district serves approximately 50,000 meals per day. Mr. Dickl, an ardent
      supporter of the American School Nutrition Association, has participated in
      several leadership positions within the Florida School Nutrition Association
      (FSNA), presenting on several panels concerning legislation and nutrition
      innovation.  Mr. Dickl also brings pertinent experience from the
      distributor side, as a sales representative for Sysco Foodservice of Central
      Florida and Heinz USA.





On
      August
      30, the Company announced that it had received from Kraki, market leader for
      value-adding ingredients and solutions to the South American food industry,
      two
      purchase orders for a total of over 12 tons of Z Trim functional food
      ingredient, dwarfing the previously largest order in Company history of
      approximately 5 tons. Over the last year, Kraki has now ordered a cumulative
      total of over 17 tons of Z Trim.





*2007
      Annual Meeting of Shareholders*





On
      August
      21, 2007, the Board of Directors of the Company decided to postpone the
      Company’s annual meeting of shareholders scheduled for August 22, 2007 in order
      to provide shareholders with updated proxy information.  The
      rescheduled date for the annual meeting will be December 19, 2007.  At
      that time the board will nominate a revised slate of directors.





**SUMMARY
      OF FINANCIAL RESULTS**





**RESULTS
      OF OPERATIONS**





**THREE
      AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE SAME PERIODS ENDING
      SEPTEMBER 30, 2006**





Revenues





Revenues
      increased 176% for the three months ended September 30, 2007 from $41,247 for
      the three months ended September 30, 2006 to $113,974.  Revenues
      increased 607% for the nine months ended September 30, 2007 from $77,022 for
      the
      nine months ended September 30, 2006 to $544,313.  The increase in
      revenues was primarily due to the increase in Z Trim product
      sales.  The following table provides a breakdown of the revenues for
      our divisions for the periods indicated:






10





Three
                months ended September 30,2007
            
            
            2006Products
            
            $
            113,974
            
            
            $
            41,051Services
            
            
            -
            
            
            
            196Total
                Revenues
            
            $
            113,974
            
            
            $
            41,247Nine
                months ended September 30,2007
            
            
            2006Products
            
            $
            544,264
            
            
            $
            76,434Services
            
            
            49
            
            
            
            588Total
                Revenues
            
            $
            544,313
            
            
            $
            77,022





Operating
      expenses





Operating
      expenses consist of payroll and related costs, stock option expense, insurance,
      occupancy expenses, professional fees, and general operating expenses. Total
      operating expenses decreased by $5,271,956 or 60% to $3,557,840 for the three
      months ended September 30, 2007 from $8,829,796 for the three months ended
      September 30, 2006. Total operating expenses decreased by $4,339,613 or
      approximately 32% to $9,268,885 for the nine months ended September 30, 2007
      from $13,608,498 for the nine months ended September 30, 2006. The decrease
      in
      operating expenses was primarily due to the decrease in stock option expense,
      net of increase in general and administrative costs.





The
      stock
      option expense for the three months ending September 30, 2007 was $1,881,481
      compared to $7,432,030 for the three months ending September 30, 2006. The
      stock
      option expense for the nine months ending September 30, 2007 was $3,251,738
      compared to $8,998,169 for the nine months ending September 30,
      2006.





Stock
      options from the Company's stock option plan have been utilized in place of
      large salaries for management, staff, and plant employees, and as compensation
      for the advisory board members.  The company has also significantly
      increased the size of its workforce over the last 12 months in the production,
      sales, and marketing areas of the company to allow for the continued expansion
      and execution of its marketing, production, and sales plans. The Company feels
      strongly that the charge for the stock options under the new accounting rules
      is
      a wise investment in the company's future.





Other
      income (expense)





Total
      other income for the three months ended September 30, 2007 was $95,031 compared
      to $41,220 for the comparable period in fiscal 2006.  Total other
      income for the nine months ended September 30, 2007 was $364,016 compared to
      $102,597 for the comparable period in fiscal 2006.  The increase was
      primarily due to a combination of a recovery of loan loss of $300,000 and
      increase in interest income, net of increase in settlement loss.





Discontinued
      Operations





In
      the
      third quarter 2007, the Company resolved to discontinue all subsidiaries, other
      than FiberGel. As a result, the security training and products segment and
      e-tailer segment was accounted for as discontinued operations whereby the
      results of operations and cash flows were removed from the Company’s results
      from continuing operations for all periods presented.





The
      Company incurred income from discontinued operations of $12,285 for nine months
      ended September 30, 2007, compared to $10,829 for the comparable period in
      fiscal 2006. No assets were sold or disposed from the discontinued
      operations.






11





Net
      loss





The
      Company reported a net loss from continuing operations of $4,083,060 or $0.06
      per share for the third quarter of 2007, a 54% decrease in the net loss from
      continuing operations of $8,968,702 or $0.15 per share for the third quarter
      of
      2006. The Company reported a net loss of $4,083,280 or $0.06 per share for
      the
      third quarter of 2007, a 54% decrease in the net loss of $8,968,501 or $0.15
      per
      share for the third quarter of 2006. This was primarily due to the combination
      of increasing revenue, decreasing stock options, and recovery of a loan
      loss.





For
      the
      nine months ending September 30, 2007, the Company reported a net loss from
      continuing operations of $10,488,063 or $0.15 per share, which is a 24% decrease
      from the net loss from continuing operations of $13,884,248, or $0.24 per share
      for the nine month period ending September 30, 2006.  The Company
      reported a net loss of $10,475,778 or $0.15 per share, which is a 24% decrease
      from the net loss of $13,873,419, or $0.24 per share for the nine month period
      ending September 30, 2006. This was primarily due to the combination of
      increasing revenue, decreasing stock options, and recovery of a loan
      loss.





Assets





The
      Company reported an increase in assets as of September 30, 2007 to $11,631,975
      from $8,755,528 for the comparable period in fiscal 2006. The increase was
      primarily due to the increase in current assets and plant assets less the
      decrease in other intangible assets.





**LIQUIDITY
      AND CAPITAL RESOURCES**





At
      September 30, 2007 the Company had cash and cash equivalents of $4,158,798,
      an
      increase of $3,483,755 from December 31, 2006. The increase in cash is due
      to
      proceeds from the sale of stock, exercise of options and warrants and
      collections on notes receivable, which total $9,010,290, less net cash flows
      used in operations of $4,814,539 and less the purchase of property and
      equipment, net of disposal proceeds, of $670,429. The Company’s capital lease
      obligations were paid off in third quarter of 2007.





Net
      cash
      used by operating activities from continuing operations increased by 27% to
      $4,814,539 for the nine months ended September 30, 2007 as compared to
      $3,802,593 for the nine months ended September 30, 2006.  The
      increased cash usage was composed of a net loss from continuing operations
      of
      $10,488,063 adjusted for non-cash items, including depreciation and amortization
      of $504,708, stock option expense of $3,251,738, non-cash service expenses
      and
      losses of $2,408,174, net of non-cash gains of $300,000, and for the net cash
      used of $191,096 from the net increases in assets and decreases in
      liabilities.





Net
      cash
      used by investing activities from continuing operations was $670,429 for the
      nine months ended September 30, 2007, as compared to net cash used by investing
      activities of $274,225 for the nine months ended September 30, 2006. The
      increase was due to increased acquisitions of manufacturing property and
      equipment for the plant in the current year.





Net
      cash
      provided by financing activities from continuing operations was $8,996,216
      for
      the nine months ended September 30, 2007 as compared to $5,801,205 for the
      nine
      months ended September 30, 2006.  Net cash provided by financing
      activities for the nine months ended September 30, 2007 was primarily from
      the
      proceeds received from the sale of stock, options and warrants exercised and
      notes receivable for stock subscriptions of $9,010,290.  Net cash
      provided by financing activities for the nine months ended September 30, 2006
      was primarily from sale of stock, proceeds from stock subscription receivable,
      and from options and warrants exercised of $5,826,583.





Net
      cash
      used by discontinued operations was $27,493 for the nine months ended September
      30, 2007 as compared to $14,665 for the nine months ended September 30, 2006.
      The increased cash usage was the net result of increases in assets and decreases
      in liabilities. The discontinued operations did not provide or use cash in
      investing and financing activities for both periods in 2007 and
      2006.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





The
      Company has no off-balance sheet arrangements as defined in Item 303(c) of
      Regulation S-B.






12





**CAUTIONARY
      STATEMENT REGARDING  FORWARD-LOOKING INFORMATION**





Certain
      information set forth in this report contains "forward-looking statements"
      within the meaning of federal securities laws. Forward looking statements
      include statements concerning our plans, objectives, goals, strategies, future
      events, future revenues or performance, capital expenditures, and financing
      needs and other information that is not historical information. When used in
      this report, the words "estimates," "expects," "anticipates," "forecasts,"
      "plans," "intends," "believes" and variations of such words or similar
      expressions are intended to identify forward-looking statements. Additional
      forward-looking statements may be made by us from time to time. All such
      subsequent forward-looking statements, whether written or oral and whether
      made
      by us or on our behalf, are also expressly qualified by these cautionary
      statements.





Our
      forward-looking statements are based upon our current expectations and various
      assumptions. Our expectations, beliefs and projections are expressed in good
      faith and are believed by us to have a reasonable basis, including without
      limitation, our examination of historical operating trends, data contained
      in
      our records and other data available from third parties, but there can be no
      assurance that our expectations, beliefs and projections will result or be
      achieved or accomplished. Our forward-looking statements apply only as of the
      date made. We undertake no obligation to publicly update or revise
      forward-looking statements which may be made to reflect events or circumstances
      after the date made or to reflect the occurrence of unanticipated
      events.





There
      are
      a number of risks and uncertainties that could cause actual results to differ
      materially from those set forth in, contemplated by or underlying the
      forward-looking statements contained in this report. Those risks and
      uncertainties include, but are not limited to, the risk that we do not regain
      compliance with the continued listing standards of the American Stock Exchange,
      risks relating to our material weakness in internal controls over financial
      reporting, our history of operating losses, lack thus far of significant market
      acceptance of our products, the fact that we may dilute existing shareholders
      through additional stock issuances, our reliance on our intellectual property,
      and the potential negative effects of manipulation in the trading of our common
      stock. Those risks and certain other uncertainties are discussed in more detail
      in our 2006 Annual Report on Form 10-KSB and our subsequent filings with the
      SEC. There may also be other factors, including those discussed elsewhere in
      this report that may cause our actual results to differ from the forward-looking
      statements. Any forward-looking statements made by us or on our behalf should
      be
      considered in light of these factors.





**ITEM
      3. CONTROLS AND PROCEDURES**





This
      report includes the certifications of our President and Chief Financial Officer
      required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange
      Act”). See Exhibits 31.1 and 31.2. This Item 3 includes information concerning
      the controls and control evaluations referred to in those
      certifications.




*Background*.  On
      October 31, 2007 we concluded that our previously issued financial statements
      for the first and second quarters of 2007 should no longer be relied upon
      because of certain accounting errors in those financial statements. Accordingly,
      we have restated our previously issued financial statements for those
      periods.




In
      addition, on August 23, 2007, we announced we were conducting an internal
      investigation of our equity accounting and reporting practices in connection
      with our receipt of a deficiency letter from the American Stock Exchange
      (Amex).  That internal investigation identified deficiencies in our
      internal controls and procedures.  As a result of those findings, as
      well as the matters for which the restatement of this report is necessary,
      we
      have identified the following control deficiencies as of the date of this report
      that constituted material weaknesses in our internal control over financial
      reporting:




•   account
                reconciliations over equity transactions were not always properly
                and
                timely performed, and the reconciliations and their supporting
                documentation were not consistently reviewed for completeness, accuracy,
                and timely resolution of reconciling items;
                and




•   we
      did not design and maintain effective controls to ensure the completeness,
      accuracy, and timeliness of the recording and reporting of equity
      transactions.




13




Our
      management, under new leadership, has been actively engaged in the planning
      for,
      and implementation of, remediation efforts to address the material
      weaknesses.  We believe our remediation measures will remediate the
      material weaknesses we have identified and strengthen our internal control
      over
      financial reporting. We are committed to continuing to improve our internal
      control processes and will continue to diligently review our financial reporting
      controls and procedures.




*Evaluation
      of Disclosure Controls and Procedures*.  Disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      are designed to ensure that information required to be disclosed in reports
      filed or submitted under the Exchange Act is recorded, processed, summarized,
      and reported within the time periods specified in SEC rules and forms and that
      such information is accumulated and communicated to management, including the
      chief executive officer and the chief financial officer, to allow timely
      decisions regarding required disclosures.




In
      connection with the preparation of this amended Report, our President and Chief
      Financial Officer reassessed the effectiveness of the design and operation
      of
      our disclosure controls and procedures. Based on that evaluation, the
      restatement of previously issued financial statements described above, and
      the
      identification of certain material weaknesses in internal control over financial
      reporting described above, which we view as an integral part of our disclosure
      controls and procedures, our President and Chief Financial Officer have
      concluded that our disclosure controls and procedures were not effective as
      of
      November 16, 2007. Nevertheless, based on a number of factors, including the
      completion of our internal investigation, our internal review that identified
      certain prior period adjustments, efforts to remediate the material weaknesses
      in internal control over financial reporting described above, and the
      performance of additional procedures by management designed to ensure the
      reliability of our financial reporting, we believe that the consolidated
      financial statements in this amended report fairly present, in all material
      respects, our financial position, results of operations and cash flows as of
      the
      dates, and for the periods, presented, in conformity with GAAP.




*Changes
      in Internal Control Over Financial Reporting*.   During the
      third and fourth quarters of 2007, we have begun the implementation of some
      remedial measures as described in our Current Report on Form 8-K filed on
      November 16, 2007.







**PART
      II - OTHER INFORMATION**





**ITEM
      1. Legal Proceedings**





As
      the
      Company previously reported, on August 8, 2007, the Company settled its
      litigation with Farhad Zaghi and related parties (collectively, “Zaghi”) in
      which the Company had sued Zaghi for collection of amounts owing on a promissory
      note and Zaghi had counterclaimed for fraud and other causes of
      action.  On October 16, 2007, the Company and Zaghi amended their
      settlement agreement.





Under
      the
      original settlement agreement, the Company was to issue to a Zaghi affiliate
      and
      register for sale 1,950,000 shares of the Company’s common stock; Zaghi was to
      liquidate those shares in an orderly fashion, on the market, via a
      mutually-acceptable broker; and the proceeds from the sales were to be divided
      between the Company and Zaghi pursuant to an established formula.  The
      original settlement agreement was designed to compensate the Zaghi parties
      for a
      portion of their alleged damages as well as to make the Company whole on the
      amounts owning under the promissory note.  Once the proceeds payable
      to the Company and Zaghi reached $800,000 and $2,591,000, respectively, then
      each party was to dismiss with prejudice its claims against the
      other.





Under
      the
      revised settlement agreement, the Company continues to be obligated to issue
      to
      a Zaghi affiliate and register for sale 1,950,000 shares of the Company’s common
      stock.  However, all proceeds of sale will inure to Zaghi’s
      benefit.  Once the total proceeds reach $1,791,000, Zaghi will dismiss
      its claims against the Company and return to the Company and remaining
      shares.  In the event the proceeds of the sales paid to Zaghi do not
      total $1,791,000, the Company will be required to issue and register additional
      shares of common stock to the Zaghi affiliate, which will be similarly
      liquidated until the shortfall is satisfied.  The registration of the
      original 1,950,000 shares is on a best-efforts basis.  If the Company
      is unable to register those shares, Zaghi has the right to terminate the
      settlement agreement and continue litigating.  With respect to the
      registration of any additional required shares, the Company may be held in
      breach of the settlement agreement, resulting in confession of judgment, if
      such
      shares are not registered within 45 days of the final sale of the original
      shares.






14





In
      connection with the amendment to the settlement agreement, the Company released
      its claims against Zaghi.  Neither party admitted any wrongdoing in
      connection with the original or amended settlement agreements.  To
      date, no shares have been registered or sold pursuant to the original or amended
      settlement agreement.





On
      November 23, 2005, the Company entered into a Letter of Agreement ("LOA") with
      George Foreman Enterprises, Inc. ("GFME") pursuant to which both parties would
      form a new limited liability company for the purpose of promoting the Company's
      zero calorie fat replacement food ingredient, Z Trim®.  The parties
      did not reach any definitive Agreement as is required by the LOA.  On
      May 9, 2006, the Company filed a lawsuit alleging breach of the Parties'
      nondisclosure agreement and trade secret misappropriation in the Circuit Court
      of the 19th Judicial District, Lake County, Illinois seeking damages and
      injunctive relief against GFME.  On August 3, 2006 the court, based
      upon a finding that the Company has demonstrated a likelihood of success on
      the
      merits of the case, issued an order granting the Company a preliminary
      injunction enforcing the non-disclosure agreement between the
      parties.  GFME subsequently appealed the preliminary
      injunction.  The Appellate Court denied GFME’s appeal, and the
      injunctive order remains in place.





On
      July
      17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim
      Holdings, Inc. in the U.S. District Court seeking damages in excess of
      $70,000,000 for specific performance, breach of contract, promissory estoppel
      and unjust enrichment.  The basis for all such claims is the
      underlying LOA, set forth above.  The Company received summary
      judgment in its favor as to the count seeking promissory
      estoppel.  Further, on September 18, 2007, the Court issued a number
      of orders limiting the evidence that GFME may bring in support of its claims.
      Management believes that GFME’s allegations are frivolous and wholly without
      merit and will vigorously defend the claim.  Trial is scheduled for
      February 2008.





On
      March
      20, 2007, the Company filed a patent infringement suit in the United States
      District Court for the Western District of Wisconsin seeking unspecified damages
      and equitable relief against a manufacturer of a competing
      product.  Trial is scheduled for February, 2008.





On
      January 18, 2007, the Company was served with a complaint by Daniel Caravette
      for breach of contract and violation of the Illinois Wage Payment and Collection
      Act, seeking damages in excess of $1,000,000.  Management believes
      that the allegations are frivolous and wholly without merit and will vigorously
      defend the claim.





On
      July
      7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
      Cluck for violation of the Consumer Fraud Act.  Management believes
      that the allegations are frivolous and wholly without merit and will vigorously
      defend the claim.





On
      or
      about August 18, 2007, the Company was served with a Statement of Claim by
      Basic
      Investors, Inc. before the FINRA Dispute Resolution organization for damages
      resulting from a claim for breach of contract.  The Company is seeking
      to settle the matter, and believes it has reached a tentative
      agreement.





**ITEM
      6.****EXHIBITS**




EXHIBIT
                NO.
            DESCRIPTION





3(i)
            Articles
                of Incorporation of Z Trim Holdings, Inc.(filed as Exhibit 2.1 to
                Z Trim's
                Registration  Statement on Form 10-SB and incorporated herein by
                reference).





3(ii)
            Bylaws
                of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the
                Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the
                Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the
                Company’s Form 8-K filed on November 16, 2007, and incorporated herein by
                reference).





4.1
            Form
                of Subscription Agreement (filed as Exhibit 4.1 to the Company's
                Form 8-K
                filed on March 30, 2006 and incorporated herein by
                reference).





4.2
            Form
                of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the
                Company's
                Form 8-K filed on March 30, 2006 and incorporated herein by
                reference).





4.3
            Form
                of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's
                Form 8-K filed on March 30, 2006 and incorporated herein by
                reference).




4.7
            Form
                of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form
                10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





4.8
            Form
                of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the
                Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





4.9
            Form
                of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.1
            Michael
                J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.2
            Dana
                L. Dabney Employment Agreement (filed as Exhibit 10.3 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.3
            Alan
                G. Orlowsky Employment Agreement dated May 1, 2007 ( filed as exhibit
                10.4 to the Company's 10-QSB filed on May 7, 2007 and incorporated
                herein by reference ).




10.4
            Brian
                S. Israel Board of Directors appointment letter dated April 30, 2007
                (filed as exhibit 10.5 to the Company's 10-QSB filed on May 7, 2007
                and
                incorporated herein by reference).




10.5
            Steve
                Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form
                10-QSB for the quarter ending June 20, 2006 and incorporated herein
                by
                reference).




10.6
            Z
                Trim Holdings, Inc. 1999 Stock Option Plan (filed as Exhibit 6.6
                to Z
                Trim’s Registration Statement on Form 10-SB and incorporated herein by
                reference).





10.7
            Z
                Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix
                C to the
                Z Trim's Proxy Statement for its Annual Meeting conducted on June
                16, 2004
                and approved by its Shareholders on that date and incorporated herein
                by
                reference).





10.8
            Industrial
                Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc.
                dated
                May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on
                Form 10-SB and incorporated herein by
                reference).





10.9
            Industrial
                Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc.
                dated
                June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration
                Statement on Form 10-SB and incorporated herein by
                reference).





10.10
            Assignment
                of License Agreement between UTEK Corporation, Z Trim Holdings, Inc.
                and
                Brookhaven Science Associates dated March 26 2003 (filed as Exhibit
                10.14
                to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and
                incorporated herein by reference).




10.11
            Assignment
                of License Agreement between UTEK Corporation, Z Trim Holdings, Inc.
                and
                University of Illinois dated July 9, 2003 (filed as Exhibit 10.15
                to Z
                Trim's Form 10-QSB for  the quarter ending September 30, 2003 and
                incorporated herein by reference).





10.12
            Assignment
                of License Agreement between Z Trim Holdings, Inc. and Brookhaven
                Science
                Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim's
                Form
                10-QSB for the quarter ending September 30, 2003 and incorporated
                herein by reference).





31.1*
            Statement
                Under Oath of Principal Executive Officer of the Company Pursuant
                to
                Section 302 of Sarbanes-Oxley Act of
                2002





31.2*
            Statement
                Under Oath of Principal Financial Officer of the Company Pursuant
                to
                Section 302 of Sarbanes-Oxley Act of
                2002





32.1*
            Statement
                Under Oath of Principal Executive Officer of the Company Pursuant
                to
                Section 906 of Sarbanes-Oxley Act of
                2002





32.2*
            Statement
                Under Oath of Principal Financial Officer of the Company Pursuant
                to
                Section 906 of Sarbanes-Oxley Act of
                2002




*      Filed
      herewith





15








**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized
      as of November 16, 2007.




**Z
              TRIM HOLDINGS,
              INC.**By:
            /s/ Steven
              J.
              CohenSteven
                J. Cohen,President
                (Principal Executive Officer) By:
            /s/ Alan
              G.
              OrlowskyAlan
                G. Orlowsky,Chief
                Financial Officer (Principal Financial Officer)







16


**INDEX
      OF EXHIBITS**







EXHIBIT
                NO.
            DESCRIPTION





3(i)
            Articles
                of Incorporation of Z Trim Holdings, Inc.(filed as Exhibit 2.1 to
                Z Trim's
                Registration  Statement on Form 10-SB and incorporated herein by
                reference).





3(ii)
            Bylaws
                of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the
                Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the
                Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the
                Company’s Form 8-K filed on November 16, 2007, and incorporated herein by
                reference).





4.1
            Form
                of Subscription Agreement (filed as Exhibit 4.1 to the Company's
                Form 8-K
                filed on March 30, 2006 and incorporated herein by
                reference).





4.2
            Form
                of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the
                Company's
                Form 8-K filed on March 30, 2006 and incorporated herein by
                reference).





4.3
            Form
                of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's
                Form 8-K filed on March 30, 2006 and incorporated herein by
                reference).




4.7
            Form
                of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form
                10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





4.8
            Form
                of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the
                Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





4.9
            Form
                of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.1
            Michael
                J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.2
            Dana
                L. Dabney Employment Agreement (filed as Exhibit 10.3 to the Company’s
                Form 10-KSB filed on April 2, 2007 and incorporated herein by
                reference).





10.3
            Alan
                G. Orlowsky Employment Agreement dated May 1, 2007 ( filed as exhibit
                10.4 to the Company's 10-QSB filed on May 7, 2007 and incorporated
                herein by reference ).




10.4
            Brian
                S. Israel Board of Directors appointment letter dated April 30, 2007
                (filed as exhibit 10.5 to the Company's 10-QSB filed on May 7, 2007
                and
                incorporated herein by reference).




10.5
            Steve
                Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form
                10-QSB for the quarter ending June 20, 2006 and incorporated herein
                by
                reference).




10.6
            Z
                Trim Holdings, Inc. 1999 Stock Option Plan (filed as Exhibit 6.6
                to Z
                Trim’s Registration Statement on Form 10-SB and incorporated herein by
                reference).





10.7
            Z
                Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix
                C to the
                Z Trim's Proxy Statement for its Annual Meeting conducted on June
                16, 2004
                and approved by its Shareholders on that date and incorporated herein
                by
                reference).





10.8
            Industrial
                Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc.
                dated
                May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on
                Form 10-SB and incorporated herein by
                reference).





10.9
            Industrial
                Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc.
                dated
                June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration
                Statement on Form 10-SB and incorporated herein by
                reference).





10.10
            Assignment
                of License Agreement between UTEK Corporation, Z Trim Holdings, Inc.
                and
                Brookhaven Science Associates dated March 26 2003 (filed as Exhibit
                10.14
                to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and
                incorporated herein by reference).




10.11
            Assignment
                of License Agreement between UTEK Corporation, Z Trim Holdings, Inc.
                and
                University of Illinois dated July 9, 2003 (filed as Exhibit 10.15
                to Z
                Trim's Form 10-QSB for  the quarter ending September 30, 2003 and
                incorporated herein by reference).





10.12
            Assignment
                of License Agreement between Z Trim Holdings, Inc. and Brookhaven
                Science
                Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim's
                Form
                10-QSB for the quarter ending September 30, 2003 and incorporated
                herein by reference).





31.1*
            Statement
                Under Oath of Principal Executive Officer of the Company Pursuant
                to
                Section 302 of Sarbanes-Oxley Act of
                2002





31.2*
            Statement
                Under Oath of Principal Financial Officer of the Company Pursuant
                to
                Section 302 of Sarbanes-Oxley Act of
                2002





32.1*
            Statement
                Under Oath of Principal Executive Officer of the Company Pursuant
                to
                Section 906 of Sarbanes-Oxley Act of
                2002





32.2*
            Statement
                Under Oath of Principal Financial Officer of the Company Pursuant
                to
                Section 906 of Sarbanes-Oxley Act of
                2002




*      Filed
      herewith





17








**Z
      TRIM HOLDINGS, INC. AND SUBSIDIARIES**


**Index
      to Financial Statements**




Consolidated
                  Balance Sheet at September 30, 2007(unaudited)
              F-1Consolidated
                  Statement of Operations as of September 30,
                  2007(unaudited)
              F-2Consolidated
                  Statements of Cash Flows as of September 30,
                  2007(unaudited)
              F-3Notes
                  to Interim Unaudited Consolidated Financial Statements
              F-4







18




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS (Unaudited)**
 
 **SEPTEMBER
        30, 2007 AND
        2006**







**ASSETS**Current
                  Assets
              
              
              **2007**
              
              
              2006Cash
                  and cash equivalents
              
              
              **$**
              **4,158,798**
              
              
              $
              1,726,157Accounts
                  receivable (net of allowance of $50,034 in 2007and
                  $0 in 2006)
              
              
              ****
              **92,404**
              
              
              
              20,745Inventory
              
              
              ****
              **588,679**
              
              
              
              95,192Prepaid
                  expenses and other assets
              
              
              ****
              **150,002**
              
              
              
              78,377Net
                  assets of discontinued operations
              
              
              ****
              **71,974**
              
              
              
              3,012**Total
                  current assets**
              
              
              ****
              **5,061,857**
              
              
              
              1,923,483Property
                  and equipment, net
              
              
              ****
              **6,412,331**
              
              
              
              6,317,775Other
                  AssetsIntangible
                  assets, net
              
              
              ****
              **143,334**
              
              
              
              503,167Deposits
              
              
              ****
              **14,453**
              
              
              
              11,103**Total
                  other assets**
              
              
              ****
              **157,787**
              
              
              
              514,270**TOTAL
                  ASSETS**
              
              
              **$**
              **11,631,975**
              
              
              $
              8,755,528**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable
              
              
              **$**
              **596,885**
              
              
              $
              220,727Accrued
                  expenses
              
              
              ****
              **303,769**
              
              
              
              136,061Stock
                  subscription payable
              
              
              ****
              **150,000**
              
              
              
              -Stock
                  option payable
              
              
              ****
              **-**
              
              
              
              632,385Capital
                  lease obligations
              
              
              ****
              **-**
              
              
              
              19,690**Total
                  current liabilities**
              
              
              ****
              **1,050,654**
              
              
              
              1,008,863Stockholders'
                  EquityCommon
                  stock, $0.00005 par value; authorized 200,000,000 shares;issued
                  and outstanding 72,056,375 shares
              
              
              ****
              **3,600**
              
              
              
              3,072Additional
                  paid-in capital
              
              
              ****
              **70,537,798**
              
              
              
              55,102,087Unamortized
                  expenses
              
              
              ****
              **-**
              
              
              
              (428,312
              )Notes
                  receivable for issuance of stock, net
              
              
              ****
              **-**
              
              
              
              (3,348
              )Accumulated
                  Deficit
              
              
              ****
              **(59,960,077**
              **)**
              
              
              (46,926,834
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              ****
              **10,581,321**
              
              
              
              7,746,665**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **11,631,975**
              
              
              $
              8,755,528
  See
          notes
          to interim unaudited consolidated financial statements
 F-1


**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS (Unaudited)**




**Three
                months ended**
            
            
            **Nine
                months ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006**REVENUES:**Products
            
            **$**
            **113,974**
            
            
            $
            41,051
            
            
            **$**
            **544,264**
            
            
            $
            76,434Services
            
            ****
            **-**
            
            
            
            196
            
            
            ****
            **49**
            
            
            
            588**Total
                revenues**
            
            ****
            **113,974**
            
            
            
            41,247
            
            
            ****
            **544,313**
            
            
            
            77,022**COST
                OF REVENUES:**Products
            
            ****
            **734,225**
            
            
            
            218,373
            
            
            ****
            **2,127,507**
            
            
            
            455,369**Total
                cost of revenues**
            
            ****
            **734,225**
            
            
            
            218,373
            
            
            ****
            **2,127,507**
            
            
            
            455,369**GROSS
                MARGIN**
            
            ****
            **(620,251**
            **)**
            
            
            (177,126
            )
            
            ****
            **(1,583,194**
            **)**
            
            
            (378,347
            )**OPERATING
                EXPENSES:**Selling,
                general and administrative
            
            ****
            **1,650,587**
            
            
            
            1,389,183
            
            
            ****
            **5,980,786**
            
            
            
            4,584,579Stock
                option expense
            
            ****
            **1,881,481**
            
            
            
            7,432,030
            
            
            ****
            **3,251,738**
            
            
            
            8,998,169Amortization
                of intangible assets
            
            ****
            **3,333**
            
            
            
            8,583
            
            
            ****
            **10,000**
            
            
            
            25,750Loss
                on asset disposals, net
            
            ****
            **22,439**
            
            
            
            -
            
            
            ****
            **26,361**
            
            
            
            -**Total
                operating expenses**
            
            ****
            **3,557,840**
            
            
            
            8,829,796
            
            
            ****
            **9,268,885**
            
            
            
            13,608,498**OPERATING
                LOSS**
            
            ****
            **(4,178,091**
            **)**
            
            
            (9,006,922
            )
            
            ****
            **(10,852,079**
            **)**
            
            
            (13,986,845
            )**OTHER
                INCOME (EXPENSES):**Rental
                and other income
            
            ****
            **10,500**
            
            
            
            9,934
            
            
            ****
            **31,500**
            
            
            
            31,500Interest
                income
            
            ****
            **58,525**
            
            
            
            25,056
            
            
            ****
            **138,055**
            
            
            
            76,485Recovery
                of loan loss
            
            ****
            **100,000**
            
            
            
            -
            
            
            ****
            **300,000**
            
            
            
            -Interest
                expense
            
            ****
            **(1,386**
            **)**
            
            
            (1,270
            )
            
            ****
            **(3,431**
            **)**
            
            
            (12,888
            )Settlement
                (loss) gain
            
            ****
            **(72,608**
            **)**
            
            
            7,500
            
            
            ****
            **(102,108**
            **)**
            
            
            7,500**Total
                other income (expenses)**
            
            ****
            **95,031**
            
            
            
            41,220
            
            
            ****
            **364,016**
            
            
            
            102,597**NET
                LOSS FROM CONTINUING OPERATIONS**
            
            **$**
            **(4,083,060**
            **)**
            
            $
            (8,965,702
            )
            
            **$**
            **(10,488,063**
            **)**
            
            $
            (13,884,248
            )**DISCONTINUED
                OPERATIONS**(Loss)
                Income from discontinued operations(net
                of applicable tax of $0 in 2007 and 2006)
            
            **$**
            **(220**
            **)**
            
            $
            (2,799
            )
            
            **$**
            **12,285**
            
            
            $
            10,829**NET
                LOSS**
            
            **$**
            **(4,083,280**
            **)**
            
            $
            (8,968,501
            )
            
            **$**
            **(10,475,778**
            **)**
            
            $
            (13,873,419
            )**Net
                Loss per Share from continuing operations****-
                Basic and Diluted**
            
            **$**
            **(0.06**
            **)**
            
            $
            (0.15
            )
            
            **$**
            **(0.15**
            **)**
            
            $
            (0.24
            )**Net
                Loss per Share - Basic and Diluted**
            
            **$**
            **(0.06**
            **)**
            
            $
            (0.15
            )
            
            **$**
            **(0.15**
            **)**
            
            $
            (0.24
            )**Weighted
                Average Number of Shares**
            
            ****
            **72,056,375**
            
            
            
            61,311,318
            
            
            ****
            **69,920,157**
            
            
            
            58,854,510






See
        notes
        to interim unaudited consolidated financial statements
   F-2
    **Z
          TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS (Unaudited)**
  
    **For
                    the Nine Months Ended September 30,**
                
                **2007**
                
                
                2006**Cash
                    Flows From Operating Activities From Continuing
                    Operations:**Net
                    loss
                
                **$**
                **(10,475,778**
                **)**
                
                $
                (13,873,419
                )Less:
                    Income from discontinued operations
                
                ****
                **12,285**
                
                
                
                10,829Adjustments
                    to reconcile net loss from continuing operations tonet
                    cash used in operating activities:Depreciation
                    and amortization
                
                ****
                **504,708**
                
                
                
                493,903Provision
                    for bad debt
                
                ****
                **50,034**
                
                
                
                -Issuance
                    of common stock and warrants for services
                
                ****
                **2,188,940**
                
                
                
                231,631Amortization
                    of noncash expenses
                
                ****
                **113,339**
                
                
                
                1,158,185Stock
                    option expense
                
                ****
                **3,251,738**
                
                
                
                8,998,169Recovery
                    of loan loss
                
                ****
                **(300,000**
                **)**
                
                
                -Loss
                    on asset disposals, net
                
                ****
                **26,361**
                
                
                
                -Stock
                    settlement
                
                ****
                **29,500**
                
                
                
                -(Increase)
                    in:Accounts
                    receivable
                
                ****
                **(130,493**
                **)**
                
                
                (5,977
                )Inventory
                
                ****
                **(384,143**
                **)**
                
                
                (13,930
                )Prepaid
                    expenses and other assets
                
                ****
                **(55,585**
                **)**
                
                
                3,941Deposits
                
                ****
                **(3,350**
                **)**
                
                
                -Decrease
                    in:Accounts
                    payable and accrued expenses
                
                ****
                **382,475**
                
                
                
                (784,267
                )**Cash
                    flows used in operating activities from continuing
                    operations**
                
                ****
                **(4,814,539**
                **)**
                
                
                (3,802,593
                )**Cash
                    Flows From Investing Activities From Continuing
                    Operations:**Purchase
                    of property and equipment
                
                ****
                **(713,604**
                **)**
                
                
                (274,225
                )Proceeds
                    from asset disposals
                
                ****
                **43,175**
                
                
                
                -**Cash
                    flows used in investing activities from continuing
                    operations**
                
                ****
                **(670,429**
                **)**
                
                
                (274,225
                )**Cash
                    Flows From Financing Activities From Continuing
                    Operations:**Net
                    proceeds from sales of stock
                
                ****
                **7,838,001**
                
                
                
                5,156,433Exercise
                    of options and warrants
                
                ****
                **872,289**
                
                
                
                485,150Net
                    payments on capital lease obligations
                
                ****
                **(14,074**
                **)**
                
                
                (25,378
                )Proceeds
                    from notes receivable for stock, net
                
                ****
                **300,000**
                
                
                
                185,000**Cash
                    flows provided by financing activities from continuing
                    operations**
                
                ****
                **8,996,216**
                
                
                
                5,801,205**Net
                    cash and cash equivalents provided by continuing
                    operations**
                
                ****
                **3,511,248**
                
                
                
                1,724,387**Net
                    cash and cash equivalents used by discontinued
                    operations**
                
                ****
                **(27,493**
                **)**
                
                
                (14,665
                )**Net
                    increase in cash and cash equivalents**
                
                ****
                **3,483,755**
                
                
                
                1,709,722Cash
                    and cash equivalents, at beginning of period
                
                ****
                **675,043**
                
                
                
                16,435**Cash
                    and cash equivalents, at end of period**
                
                **$**
                **4,158,798**
                
                
                $
                1,726,157Supplemental
                    Disclosures of Cash Flow Information:Interest
                    paid
                
                **$**
                **3,430**
                
                
                $
                12,888Supplemental
                    Schedule of Noncash Investing and Financing Activities:Issuance
                    of common stock and warrants for services
                
                **$**
                **2,188,940**
                
                
                $
                1,560,810Stock
                    subscription payable and notes receivable incurred for issuance
                    of
                    stock
                
                **$**
                **150,000**
                
                
                $
                3,348Retirement
                    of treasury stock
                
                **$**
                **-**
                
                
                $
                11,269




See
        notes
        to interim unaudited consolidated financial statements
   F-3




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**











**NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




***Nature
      of Business***




Z
      Trim
      Holdings, Inc. (the “Company”) manufactures a functional food ingredient, Z
      Trim, and other Z Trim related products.  The company will continue
      exploring all available options for its other Z Trim technologies and related
      assets.




The
      Company has participated in several public and private offerings and has
      expanded its business.  In 2002, the Company acquired FiberGel
      Technologies, Inc. (“FiberGel”), which owns an exclusive license to Z Trim, an
      all-natural, agriculture-based fat replacement.




The
      Company has three reportable business unit segments: food product development,
      security product development and e-tailer.  The Company operates
      through its FiberGel, The Brave Way Training Systems, Inc.(“Braveway”), On-Line
      Bedding Corp. (“On-Line”), and Z-Amaize Technologies, Inc.
      divisions.  On July 18, 2007 the Board of Directors resolved to
      dissolve and liquidate On-Line, which is the E-tailer operating
      segment.  On September 17, 2007 the Board of Directors resolved to
      dissolve all company subsidiaries, other than FiberGel, on or before December
      31, 2007.  The related assets over liabilities of the dissolved
      segments have an approximate carrying deficit of $6,000, including intercompany
      payables of $78,000.




A
      summary
      of significant accounting policies follows.




***Presentation
      of Interim Information***




The
      financial information at September 30, 2007 and for the three and nine months
      ended September 30, 2007 and 2006 is unaudited, but includes all adjustments
      (consisting only of normal recurring adjustments) that the Company considers
      necessary for a fair presentation of the financial information set forth herein,
      in accordance with accounting principles generally accepted in the United States
      (“U.S. GAAP”) for interim financial information, and with the instructions to
      Form 10-QSB and Item 310 (b) of Regulation S-B. Accordingly, such
      information does not include all of the information and footnotes required
      by
      U.S. GAAP for annual financial statements. For further information, refer to
      the
      consolidated financial statements and footnotes thereto included in the
      Company’s annual Report on Form 10-KSB for the year ended December 31,
      2006.





The
      results for the three and nine months ended September 30, 2007 may not be
      indicative of results for the year ending December 31, 2007 or any future
      periods.




***Principle
      of Consolidation and Presentation***




The
      accompanying consolidated financial statements include the accounts of Z Trim
      Holdings Inc. and its subsidiaries after elimination of significantly all
      intercompany accounts and transactions.  Certain prior period items
      have been reclassified from operating expenses to cost of goods sold for ease
      of
      comparison. This reclassification affects neither the net loss nor the
      accumulated deficit of the Company.





On
      September 17, 2007, the Company resolved to discontinue all subsidiaries, other
      than FiberGel.  Accordingly, the accompanying consolidated financial
      statements for the three and nine months ended September 30, 2007 and 2006
      have
      been restated to present the results of the segments as discontinued
      operations.




Use
      of
      estimates





The
      preparation of the accompanying consolidated financial statements in conformity
      with accounting principles generally accepted in the United States (U.S. GAAP)
      requires management to make certain estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Actual results could
      differ from those estimates.




F-4


**Z
          TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
          TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**




**NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)**




Income
      (Loss) Per Common Share


Basic
      net
      income (loss) per share includes no dilution and is computed by dividing net
      income (loss) available to common stockholders by the weighted average number
      of
      common stock outstanding for the period. Diluted earnings per share is computed
      by dividing net income by the weighted average number of shares outstanding
      and,
      when diluted, potential shares from options and warrants to purchase common
      stock using the treasury stock method. Diluted net loss per common share does
      not differ from basic net loss per common share since potential shares of common
      stock are anti-dilutive for all periods presented.




Cashless
      Exercise of Warrants




The
      Company has issued warrants to purchase common stock where the holder is
      entitled to exercise the warrant via a cashless exercise, when the exercise
      price is less than the fair value of the common stock. The Company accounts
      for
      the issuance of common stock on the cashless exercise of warrants as a cost
      of
      capital.




Stock
      Based Compensation


Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of FASB Statement No. 123(R), “Share-Based Payment” (SFAS 123R), using the
      modified-prospective-transition method. Under that transition method,
      compensation cost recognized in 2006 includes: (a) compensation cost for
      all share-based payments granted prior to, but not yet vested as of
      January 1, 2006 based on the grant date fair value calculated in accordance
      with the original provisions of SFAS 123, and (b) compensation cost for all
      share-based payments granted subsequent to December 31, 2005, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS
      123(R).




As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Company recognized
      pre-tax compensation expense related to stock options of $1,881,481 and
      $3,251,738 for the three and nine months ended September 30, 2007, respectively
      and $7,432,030 and $8,998,169 for the three and nine months ended September
      30,
      2006, respectively.  The 2007 stock option expense includes an
      additional charge of $1,642,465 from the modification of 12,996,773 out-of-money
      options.  Of these options, 345,000 were granted a two year extension,
      45,000 were an increase of $2.70 to the exercise and 12,606,773 were granted
      a
      one year extension not to exceed an exercise date of August 20, 2010. The 2006
      stock option expense includes an additional charge of $1,199,402 from the
      modification of 1,620,000 out-of-money options. These options were granted
      a
      lower exercise price and at two year extension.





New
      Accounting Pronouncements





In
      May
      2007, the FASB issued FASB Staff Position No. FIN 48-1 (“FSP 48-1”),
*Definition of Settlement in FASB Interpretation No. 48*.  FSP
      48-1 amended FIN 48 to provide guidance on how an enterprise should determine
      whether a tax position is effectively settled for the purpose of recognizing
      previously unrecognized tax benefits.  FSP 48-1 required application
      upon the initial adoption of FIN 48.  The adoption of FSP 48-1 did not
      affect the Company’s condensed consolidated financial statements.





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Financial Accounting Standards (“FAS”) No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115*, which permits entities to choose to measure many
      financial instruments and certain other items at fair value at specified
      election dates. A business entity is required to report unrealized gains and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is expected to expand the use
      of
      fair value measurement. FAS No.159 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years.







In
      September 2006, the FASB issued FAS No. 157, *Fair Value Measurements*.
      FAS No. 157 defines fair value, establishes a framework for measuring fair
      value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. This statement addresses how to calculate fair value
      measurements required or permitted under other accounting pronouncements.
      Accordingly, this statement does not require any new fair value measurements.
      However, for some entities, the application of the statement will change current
      practice. FAS No. 157 is effective for the Company beginning January 1, 2008.
      The Company is currently evaluating the impact of this standard.




F-5


**Z
          TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
          TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**


**NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)**




In
      September 2006, the Securities and Exchange Commission ("SEC") staff issued
      Staff Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements. The stated purpose of SAB 108 is to provide consistency between
      how
      registrants quantify financial statement misstatements.




Prior
      to
      the issuance of SAB 108, there have been two widely-used methods, known as
      the
      "roll-over" and "iron curtain" methods, of quantifying the effects of financial
      statement misstatements. The roll-over method quantifies the amount by which
      the
      current year income statement is misstated while the iron curtain method
      quantifies the error as the cumulative amount by which the current year balance
      sheet is misstated. Neither of these methods considers the impact of
      misstatements on the financial statements as a whole.




SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the Company's
      financial statements and the related financial statement disclosures. This
      approach is referred to as the "dual approach" as it requires quantification
      of
      errors under both the roll-over and iron curtain methods.




SAB
      108
      allows registrants to initially apply the dual approach by either retroactively
      adjusting prior financial statements as if the dual approach had always been
      used, or by recording the cumulative effect of initially applying the dual
      approach as adjustments to the carrying values of assets and liabilities as
      of
      January 1, 2006 with an offsetting adjustment recorded to the opening balance
      of
      retained earnings.




The
      Company will initially apply SAB 108 using the cumulative effect transition
      method in connection with the preparation of the annual financial statements
      for
      the year ending December 31, 2006. The Company does not believe the adoption
      of
      SAB 108 will have a significant effect on its consolidated financial
      statements.






**NOTE
      2 – INVENTORY**




At
      September 30, inventory consists of the following:




2007
              
              
              2006Raw
                  materials
              
              $
              34,893
              
              
              $
              25,271Work-in-process
              
              
              6,273
              
              
              
              8,352Packaging
              
              
              45,965
              
              
              
              24,067Finished
                  goods
              
              
              501,548
              
              
              
              37,502Total
                  inventory
              
              $
              588,679
              
              
              $
              95,192




**NOTE
      3 – PROPERTY AND EQUIPMENT, NET**




At
      September 30, property and equipment, net consists of the
      following:




2007
              
              
              2006Production,
                  engineering and other equipment
              
              $
              5,331,757
              
              
              $
              4,685,595Leasehold
                  improvements
              
              
              2,798,972
              
              
              
              2,696,403Office
                  equipment and furniture
              
              
              591,384
              
              
              
              574,960Computer
                  equipment and related software
              
              
              179,383
              
              
              
              331,112Construction
                  in process - equipment
              
              
              -
              
              
              
              110,7238,901,496
              
              
              
              8,398,793Accumulated
                  depreciation
              
              
              (2,489,165
              )
              
              
              (2,081,018
              )Property
                  and equipment, net
              
              $
              6,412,331
              
              
              $
              6,317,775


F-6
  **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
            STATEMENTS**


**NOTE
      4 – INTANGIBLE ASSETS**




During
      the first nine months of fiscal 2007, no significant identified intangible
      assets were acquired and no identified intangible assets were impaired. The
      following table present details of the Company’s purchased intangible
      assets:




GrossCarrying
              
              
              AccumulatedAmount
              
              
              Amortization
              
              NetLicense
                  Rights toWebsite
              
              $
              200,000
              
              
              $
              (56,666
              )
              
              $
              143,334




Amortization
      of intangibles was $10,000 and $25,750 for the nine months ended September
      30,
      2007 and 2006, respectively.




Based
      on
      the carrying amount of the intangibles as of September 30, 2007, and assuming
      no
      impairment of the underlying assets, the estimated future amortization is as
      follows:




Years
                  ended December 31,2007
                  (Oct 1 to December 31)
              
              $
              3,3332008
              
              
              13,3332009
              
              
              13,3332010
              
              
              13,3332011
              
              
              13,333Thereafter
              
              
              86,669Total
                  amortization
              
              $
              143,334









F-7




**Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
            STATEMENTS**




**NOTE
      5 – STOCKHOLDERS' EQUITY**






Private
      Placement Offerings




On
      February 2, 2007, the Company entered into an agreement with J.P. Turner &
Company, L.L.C. to sell shares of the Company’s common stock, par value $0.00005
      per share (“Common Stock”), and warrants exercisable for Common Stock (the
“Warrants”).  The purchase price was $1.00 per share, which was
      greater than 70% of the volume weighted average price of the Company’s common
      stock for the 90 days from the day prior to the closing date, which was March
      29, 2007.  The investors also received a 25% stock warrant at an
      exercise price equal to 120% of the purchase price.  The Warrants have
      a term of 5 years.




The
      offering closed on March 29, 2007.  In the aggregate the Company sold
      8,000,000 shares of its common stock and 2,000,000 warrants.  J.P.
      Turner & Company, L.L.C received a placement fee of 10% of the gross
      proceeds and 15% warrant coverage with an exercise price equal to the purchase
      price.  The Company received $6,958,000 in proceeds, which is net of
      offering costs and commissions of $1,042,000.




The
      Company filed a Registration Statement covering the resale of the Common Stock
      underlying the units and Warrants with the SEC.  The Company has
      responded to all SEC comments and is waiting for the registration approval
      from
      the SEC.




In
      May
      2007, the Company conducted a self-underwritten offering of the Company’s common
      stock.  The stock was sold for $100,000 per unit.  Each unit
      consisted of 100,000 shares of common stock and 25,000 warrants.  The
      warrants are exercisable at $1.20 per share and expire in five (5) years after
      purchase of the above-described unit.  The Company sold and issued
      880,000 shares and received proceeds of $880,000 under the
      offering.  The Company has received a stock subscription for 150,000
      shares of its common stock and 37,500 warrants under the
      offering.  The Company is waiting approval from the American Stock
      Exchange for issuance of the shares.




On
      March
      24 through 30, 2006, the Company entered into private placement subscription
      agreements pursuant to which it sold unregistered shares of our common stock,
      par value $0.00005 per share (“Common Stock”), and warrants exercisable for
      Common Stock.  The Company sold approximately 205 units in the private
      placement, with each unit consisting of 40,323 shares of Common
      Stock.  In addition, investors who invested at least $500,000 in the
      private placement received a five-year warrant with an exercise price of $1.00
      per share to purchase a number of shares of Common Stock equal to 10% of the
      number of shares of Common Stock purchased (the “Warrants”).  In the
      aggregate the Company sold 8,245,368 shares of Common Stock, and Warrants to
      purchase an additional 161,292 shares of Common Stock.  Proceeds from the
      sale, net of commissions and fees of $521,865, totaled
      $4,536,433.  The Company has registered the Common Stock and
      underlying Warrants with the SEC as free trading shares.




National
      Securities Corporation (“National Securities”) served as the lead placement
      agent in connection with the private placement. National Securities received
      cash fees in the aggregate of $521,865 and warrants to purchase 824,537 shares
      of Common Stock on terms which are identical to the Warrants included in the
      units except that the exercise price is $0.68 per share and they contain an
      assignment provision.  In addition, the placement agent’s warrant has
      registration rights that are the same as those afforded to investors in the
      private placement.




The
      Company determined that all of the securities sold and issued in the private
      placement were exempt from registration under the Securities Act of 1933, as
      amended (the “Act”) pursuant Section 4(2) of the Act and Rule 506 of Regulation
      D Promulgated under the Act.  The Company based this determination on
      the non-public manner in which it offered the securities and on the
      representations of the persons purchasing such securities, which included,
      in
      pertinent part, that such persons were “accredited investors” within the meaning
      of Rule 501 of Regulation D promulgated under the Act, and that such persons
      were acquiring such securities for investment purposes for their own respective
      accounts and not as nominees or agents, and not with a view to resale or
      distribution, and that each such persons understood such securities may not
      be
      sold to or otherwise disposed of without registration under the Act or an
      applicable exemption there from.




In
      January 2006, the Company conducted a self-underwritten offering of the
      Company’s common stock up to $1.24 million.  The stock was sold for
      $31,000 per unit.  Each unit consisted of 50,000 shares of common
      stock and 50,000 warrants.  The warrants are exercisable at $1.00 per
      share and expire in three (3) years after purchase of the above-described
      unit.  The Company sold and issued 1,000,000 shares and received
      proceeds of $620,000 under the offering.






F-8





**Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
            STATEMENTS**




**NOTE
      5 – STOCKHOLDERS' EQUITY (CONTINUED)**






***Exercising
      of Stock Warrants and Options***




During
      the first nine months of 2007 and 2006, respectively, 1,014,163 and 1,061,400
      stock warrants and options were exercised.  The Company received total
      proceeds of $872.289 and $485,150, respectively.  The 2007 warrants
      exercised are net of 879,996 shares rescinded by the Board of Directors on
      April
      30, 2007.






Common
      Stock Issued on the Cashless Exercise of Warrants




During
      February 2007 the Company issued 11,578 shares of common stock on the cashless
      exercise of warrants.






Release
      of common stock stop order




On
      November 22, 2004, the Company entered into a two-year engagement with David
      Shemesh and Mordechai Tobian for investor relations services in consideration
      of
      2,250,000 shares of restricted common stock of the Company (the "Shemesh/Tobian
      Shares") and a warrant to purchase 275,000 shares of restricted common stock
      at
      $.80 per share through November 21, 2007.




Based
      on
      a closing price of the Company's common stock of $.79 on November 22, 2004,
      the
      Company recorded paid-in-capital of $1,777,500 as of that date and began to
      recognize investor relation expenses on a quarterly basis over the life of
      the
      two-year contract.




On
      August
      24, 2005, the Company took the position that Shemesh and Tobian had failed
      to
      perform as agreed and the Company purported to rescind the contract.
      Simultaneously, the Company placed a stop order on the Shemesh/Tobian Shares.
      Through that date, the Company had recognized $765,325 of expense relating
      to
      the contract. Accordingly, at September 30, 2005 the Company wrote off the
      remaining $1,012,175 against paid-in-capital.




Shemesh
      and Tobian disputed the Company's basis for rescinding the contract and because
      they were referred to the Company by Farhad Zaghi, the Company's purported
      rescission became an issue in the Company's ongoing litigation with Zaghi and
      his affiliates. In order to eliminate one of the issues of contention between
      the parties and facilitate further settlement negotiations, on March 9, 2007,
      the Company released the stop order on the Shemesh/Tobian Shares and allowed
      the
      shares to be traded.  The Company recognized an expense to investor
      relations of $2,182,175, based on the closing price on March 9,
      2007.




F-9


**Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL
            STATEMENTS**




**NOTE
        6 – NET LOSS PER SHARE**
  The
        computation of basic and diluted net loss per share is as follows:


**Three
                  months ended**
                  **September
                    30,**
              
              
              **Nine
                  months ended**
                  **September
                    30,****2007**
              
              
              2006
              
              
              **2007**
              
              
              2006Numerator:Net
                  loss from continuing operations
              
              **$**
              **(4,083,060**
              **)**
              
              $
              (8,965,702
              )
              
              **$**
              **(10,488,063**
              **)**
              
              $
              (13,884,248
              )(Loss)
                  Income from discontinued operations
              
              **$**
              **(220**
              **)**
              
              $
              (2,799
              )
              
              **$**
              **12,285**
              
              
              $
              10,829Net
                  loss
              
              **$**
              **(4,083,280**
              **)**
              
              $
              (8,968,501
              )
              
              **$**
              **(10,475,778**
              **)**
              
              $
              (13,873,419
              )Denominator:Weighted
                  average number ofshares
                  outstanding
              
              ****
              **72,056,375**
              
              
              
              61,311,318
              
              
              ****
              **69,920,157**
              
              
              
              58,854,510Net
                  loss per share from continuing operations- basic and
                  diluted
              
              **$**
              **(0.06**
              **)**
              
              $
              (0.15
              )
              
              **$**
              **(0.15**
              **)**
              
              $
              (0.24
              )(Loss)
                  income per share from discontinued operations - basic and
                  diluted
              
              **$**
              **(0.00**
              **)**
              
              $
              (0.00
              )
              
              **$**
              **0.00**
              
              
              $
              0.00Net
                  loss per share-basic and diluted
              
              **$**
              **(0.06**
              **)**
              
              $
              (0.15
              )
              
              **$**
              **(0.15**
              **)**
              
              $
              (0.24
              )


As
      the
      Company incurred net losses for the three and nine months ended September 30,
      2007, the effect of dilutive securities totaling 697,241 and 3,969,501
      equivalent shares, respectively, has been excluded from the calculation of
      diluted loss per share because their effect was anti-dilutive.




As
      the
      Company incurred net losses for the three and nine months ended September 30,
      2006, the effect of dilutive securities totaling 6,175,432 and 4,531,488
      equivalent shares, respectively, has been excluded from the calculation of
      diluted loss per share because their effect was anti-dilutive.




**NOTE
      7 – STOCK OPTION PLAN**




The
      Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended
      in 2004, which provides for the issuance of qualified options to all employees
      and non-qualified options to employees, directors, consultants and other service
      providers.




A
      summary
      of the status of stock options issued by the Company as of September 30, 2007
      and 2006 is presented in the following table:




2007
              
              
              
              
              
              2006Weghted
              
              
              
              
              
              WeghtedNumber
              
              
              Average
              
              
              Number
              
              
              Averageof
              
              
              Exercise
              
              
              of
              
              
              ExerciseShares
              
              
              Price
              
              
              Shares
              
              
              PriceOutstanding
                  at beginning of year
              
              
              20,285,749
              
              
              $
              0.99
              
              
              
              12,892,939
              
              
              $
              1.03Granted
              
              
              2,072,000
              
              
              
              1.26
              
              
              
              11,566,337
              
              
              
              1.06Exercised
              
              
              (453,318
              )
              
              
              0.77
              
              
              
              (906,400
              )
              
              
              0.39Expired
                  and Cancelled
              
              
              (6,042,908
              )
              
              
              0.96
              
              
              
              (2,740,000
              )
              
              
              1.64Outstanding
                  at end of period
              
              
              15,861,523
              
              
              $
              1.04
              
              
              
              20,812,876
              
              
              $
              0.99Exercisable
                  at end of period
              
              
              15,416,523
              
              
              $
              1.04
              
              
              
              20,812,876
              
              
              $
              0.99






F-10




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


The
      fair
      value of each stock option granted is estimated on the date of grant using
      the
      Black-Scholes option valuation model.  This model uses the assumptions
      listed in the table below. Expected volatilities are based on the historical
      volatility of the Company’s stock.  The risk-free rate for periods
      within the expected life of the option is based on the U.S. Treasury yield
      curve
      in effect at the time of grant.


2007
                
                
                2006Weighted
                    average fair value per option granted
                
                $
                0.78
                
                
                $
                0.78Risk-free
                    interest rate
                
                
                4.65
                %
                
                
                4.73
                %Expected
                    dividend yield
                
                
                0.00
                %
                
                
                0.00
                %Expected
                    lives
                
                
                3.00
                
                
                
                3.00Expected
                    volatility
                
                
                108.35
                %
                
                
                129.22
                %




As
      of
      September 30, 2007, there was $351,856 of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements granted under the
      plan.  $298,026 is expected to be recognized over the subsequent five
      months.  $62,830 will be recognized upon completion of contractual
      performance.




Stock
      options outstanding at September 30, 2007 are as follows:




WeightedAverage
              
              WeightedRange
                  of
              
              
              
              Remaining
              AverageExercise
              
              Options
              
              Contractual
              Exercise
              
              OptionsPrices
              
              Outstanding
              
              Life
              
              Price
              
              Exercisable$0.01-$1.50
              15,366,523
              
              2.2
                  years
              
              $     1.00
              
              14,921,523$1.51-$5.00
              
              495,000
              
              2.4
                  years
              
              $     2.35
              
              495,00015,861,523
              
              2.2
                  years
              
              $     1.04
              
              15,416,523




As
      of
      September 30, 2007 and 2006, the Company has warrants outstanding to purchase
      7,149,234 and 5,956,824 shares of the Company’s common stock, respectively, at
      prices ranging from $0.45 to $6.40 per share.  These warrants expire
      at various dates through May 2012.






**NOTE
      8 – SETTLEMENT LOSS**




In
      April
      2007, the Company and two former investor relation consultants entered into
      revised settlement agreements to replace and rescind the original settlement
      agreements signed in October 2006.  As a result, an additional 10,000
      shares of the Company’s common stock at a fair value of $29,500 was issued and
      recorded.  On April 1, 2007, 275,000 shares were issued in excess of
      the revised agreement and will be cancelled pending regulatory approval from
      the
      American Stock Exchange.




F-11




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      9 – MAJOR CUSTOMERS AND CREDIT CONCENTRATION**




The
      Company’s principal customers are wholesale companies.  There were no
      significant customers for the nine months ended September 30, 2007 and two
      customers accounted for approximately 45% for the nine months ended September
      30, 2006.




The
      Company maintains cash deposits with major banks, which from time to time may
      exceed federally insured limits.  The Company periodically assesses
      the financial condition of the institutions and believes that the risk of any
      loss is minimal.




**NOTE
      10 – PENDING LITIGATION**




As
      the
      Company previously reported, on August 8, 2007, the Company settled its
      litigation with Farhad Zaghi and related parties (collectively, “Zaghi”) in
      which the Company had sued Zaghi for collection of amounts owing on a promissory
      note and Zaghi had counterclaimed for fraud and other causes of
      action.  On October 16, 2007, the Company and Zaghi amended their
      settlement agreement.




Under
      the
      original settlement agreement, the Company was to issue to a Zaghi affiliate
      and
      register for sale 1,950,000 shares of the Company’s common stock; Zaghi was to
      liquidate those shares in an orderly fashion, on the market, via a
      mutually-acceptable broker; and the proceeds from the sales were to be divided
      between the Company and Zaghi pursuant to an established formula.  The
      original settlement agreement was designed to compensate the Zaghi parties
      for a
      portion of their alleged damages as well as to make the Company whole on the
      amounts owning under the promissory note.  Once the proceeds payable
      to the Company and Zaghi reached $800,000 and $2,591,000, respectively, then
      each party was to dismiss with prejudice its claims against the
      other.




Under
      the
      revised settlement agreement, the Company continues to be obligated to issue
      to
      a Zaghi affiliate and register for sale 1,950,000 shares of the Company’s common
      stock.  However, all proceeds of sale will inure to Zaghi’s
      benefit.  Once the total proceeds reach $1,791,000, Zaghi will dismiss
      its claims against the Company and return to the Company any remaining
      shares.  In the event the proceeds of the sales made by Zaghi do not
      total $1,791,000, the Company will be required to issue and register additional
      shares of common stock to the Zaghi affiliate, which will be similarly
      liquidated until the shortfall is satisfied.  The registration of the
      original 1,950,000 shares is on a best-efforts basis.  If the Company
      is unable to register the original shares, Zaghi will have the right to rescind
      the settlement agreement and resume litigating.  With respect to the
      registration of any additional required shares, the Company may be held in
      breach of the settlement agreement, resulting in confession of judgment, if
      such
      shares are not registered within 45 days of the final sale of the original
      shares.




In
      connection with the amendment to the settlement agreement, the Company released
      its claims against Zaghi.  Neither party admitted any wrongdoing in
      connection with the original or amended settlement agreements.  To
      date, no shares have been registered or sold pursuant to the original or amended
      settlement agreement.  Prior to the revised settlement, as of
      September 30, 2007, the Company received loan recovery of $300,000.




On
      August
      8, 2007, the Company entered into a revised agreement to issue warrants to
      purchase 1,604,166 shares to the Zaghi parties no sooner than December 1, 2007
      and no later than 18 months subsequent to the date in which the Zaghi parties
      are paid in full.  The exercise price will be calculated as the 45
      trading day trailing average of the closing price of Z Trim stock immediately
      preceding the chosen date of the Zaghi parties, but not to exceed $1.25 per
      share.  The warrants will be exercisable for two years from issue
      date. The Company also agreed to issue additional warrant or warrants to
      purchase 662,500 shares of Z Trim stock under the above said term except that
      the exercise price will be at five percent (5%) discount.




On
      November 23, 2005, the Company entered into a Letter of Agreement ("LOA") with
      George Foreman Enterprises, Inc. ("GFME") pursuant to which both parties would
      form a new limited liability company for the purpose of promoting the Company's
      zero calorie fat replacement food ingredient, Z Trim®.  The parties
      did not reach any definitive Agreement as is required by the LOA.  On
      May 9, 2006, the Company filed a lawsuit alleging breach of the Parties'
      nondisclosure agreement and trade secret misappropriation in the Circuit Court
      of the 19th Judicial District, Lake County, Illinois seeking damages and
      injunctive relief against GFME.  On August 3, 2006 the court, based
      upon a finding that the Company has demonstrated a likelihood of success on
      the
      merits of the case, issued an order granting the Company a preliminary
      injunction enforcing the non-disclosure agreement between the
      parties.  GFME subsequently appealed the preliminary
      injunction.  The Appellate Court denied GFME’s appeal, and the
      injunctive order remains in place.




F-12




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


On
      July
      17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim
      Holdings, Inc. in the U.S. District Court seeking damages in excess of
      $70,000,000 for specific performance, breach of contract, promissory estoppel
      and unjust enrichment.  The basis for all such claims is the
      underlying LOA, set forth above.  The Company received summary
      judgment in its favor as to the count seeking promissory
      estoppel.  Further, on September 18, 2007, the Court issued a number
      of orders limiting the evidence that GFME may bring in support of its claims.
      Management believes that GFME’s allegations are frivolous and wholly without
      merit and will vigorously defend the claim.  Trial is scheduled for
      February, 2008.




On
      March
      20, 2007, the Company filed a patent infringement suit in the United States
      District Court for the Western District of Wisconsin seeking unspecified damages
      and equitable relief against a manufacturer of a competing
      product.  Trial is scheduled for February, 2008.




On
      January 18, 2007, the Company was served with a complaint by Daniel Caravette
      for breach of contract and violation of the Illinois Wage Payment and Collection
      Act, seeking damages in excess of $1,000,000.  Management believes
      that the allegations are frivolous and wholly without merit and will vigorously
      defend the claim.




On
      July
      7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
      Cluck for violation of the Consumer Fraud Act.  Management believes
      that the allegations are frivolous and wholly without merit and will vigorously
      defend the claim.




On
      or
      about August 18, 2007, the Company was served with a Statement of Claim by
      Basic
      Investors, Inc. before the FINRA Dispute Resolution organization for damages
      resulting from a claim for breach of contract.  The Company is seeking
      to settle the matter, and believes it has reached a tentative
      agreement.  The Company has accrued $69,000 as of September 30, 2007
      for potential liability on the settlement.




**NOTE
      11 – RELATED PARTY TRANSACTIONS**




In
      May
      2007, the Board of Directors resolved to rescind a consulting agreement issued
      for options on October 5, 2006.  The agreement was with the brother of
      the Vice President.  The related options were exercised for 200,000
      shares at $0.75 per share or $150,000 in October 2006.  The Board
      further resolved to approve the related party to use the proceeds to subscribe
      the shares pursuant to the Company’s May 2007 self-underwritten offering (see
      Note 5).  The subscription is pending regulatory approval from the
      American Stock Exchange.  Common stock and paid in capital were
      decreased and stock subscription payable was recorded for $150,000.




The
      Company had a stock subscription receivable of $20,000 from the President
      related to exercising his stock options in 2005.  The stock
      subscription receivable was paid in full on September 30, 2006 including $675
      of
      interest.






**NOTE
      12 – GUARANTEES**




The
      Company from time to time enters into certain types of contracts that
      contingently require the Company to indemnify parties against third party
      claims. These contracts primarily relate to: (i) divestiture agreements, under
      which the Company may provide customary indemnifications to purchasers of the
      Company’s businesses or assets; (ii) certain real estate leases, under which the
      Company may be required to indemnify property owners for environmental and
      other
      liabilities, and other claims arising from the Company’s use of the applicable
      premises; and (iii) certain agreements with the Company's officers, directors
      and employees, under which the Company may be required to indemnify such persons
      for liabilities arising out of their employment relationship.  The
      terms of such obligations vary. Generally, a maximum obligation is not
      explicitly stated. Because the obligated amounts of these types of agreements
      often are not explicitly stated, the overall maximum amount of the obligations
      cannot be reasonably estimated. Historically, the Company has not been obligated
      to make significant payments for these obligations, and no liabilities have
      been
      recorded for these obligations on its consolidated balance sheet as of September
      30, 2007.





In
      general, the Company offers a one-year warranty for most of the products it
      sold.  To date, the Company has not incurred any material costs
      associated with these warranties.






F-13




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      13 – RESIGNATION OF CHIEF EXECUTIVE OFFICER/
      REPLACEMENT**




On
      August
      20, 2007 the founder and Chief Executive Officer (“CEO”), Gregory J. Halpern,
      resigned as CEO and member of the Board of Directors.  Steve J. Cohen,
      the Company’s President, replaced Mr. Halpern as CEO and also serves on the
      Company's Board of Directors.




The
      company entered into a Resignation Agreement and Release with Mr. Halpern
      pursuant to which the company awarded Mr. Halpern three months' severance pay
      and six months' health insurance benefits.  In addition, under the
      Agreement the Company will receive a release of claims from Mr.
      Halpern.  In addition, under the provisions of the company's stock
      option plan, Mr. Halpern's and his immediate family members’ outstanding stock
      options have been rescinded.  The company allowed Mr. Halpern until
      August 31, 2007 to rescind the Agreement.




On
      August
      31, 2007 Gregory Halpern has exercised his right to revoke the Resignation
      Agreement and Release he signed on August 20, 2007.  Mr. Halpern's
      revocation of the Agreement does not affect his prior resignation as an officer
      and director of the Company and does not affect the Board of Directors' previous
      forfeiture of Mr. Halpern's stock options under the Company's 2004 Equity
      Incentive Plan.






**NOTE
      14 – APPOINTMENT OF PRINCIPAL OFFICERS/ AUDIT COMMITTEE
      CHAIRMAN**




On
      May 1,
      2007, the Board of Directors appointed Alan Orlowsky as the Company’s Chief
      Financial Officer (“CFO”).  Mr. Orlowsky has served as a member of the
      Company’s Board of Directors and was the Chairman of the Company’s Audit
      Committee.  He resigned those positions as of April 30,
      2007.  The former CFO resigned his position as of April 30, 2007, and
      the Board of Directors appointed him as the Company’s Vice President effective
      May 1, 2007 and he remained on the Company’s Board of Directors.




The
      Board
      of Directors has appointed Brian Israel as the new audit committee chair of
      the
      Company to fill the vacancy created by Mr. Orlowsky’s departure.






**NOTE
      15 – EMPLOYMENT AGREEMENTS**




During
      2007, the Company entered into four employment agreements with its principal
      officers.  The annual salaries range from $102,000 to
      $185,000.  The agreements expire May 2009 through January
      2010






**NOTE
      16 – ANNUAL MEETING OF SHAREHOLDERS**




The
      Company's Board of Directors voted to postpone the annual meeting of
      shareholders previously scheduled for August 22, 2007, to provide time to
      prepare updated proxy information.  The rescheduled date for the
      annual meeting will be December 19, 2007.  At that time the board will
      nominate a revised slate of directors.




**NOTE
      17 – AMERICAN STOCK EXCHANGE DEFICIENCY LETTER/ CORRECTIVE ACTION/ SUBSEQUENT
      EVENT**




On
      August
      17, 2007, the American Stock Exchange ("Amex") notified the Company that the
      staff of the Amex has determined that the Company is not in compliance with
      the
      continued listing standards of Amex.  The letter constitutes a
      Deficiency Letter pursuant to Section 1009 of the Amex Company Guide
      (“Guide”).  Amex has provided the Company the opportunity to submit a
      compliance plan to resolve the deficiencies.  On October 26, 2007,
      Amex notified the Company that it had determined that, in accordance with
      Section 1009 of the Guide, the Company made a reasonable demonstration of its
      ability to regain compliance with the continued listing standards by the end
      of
      the plan period, which Amex has determined to be no later than December 17,
      2007.  Amex will continue the listing of the Company subject to
      certain conditions.




Amex
      has
      not initiated a de-listing procedure or suspended trading in the Company's
      common stock.




F-14




**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      18 – DISCONTINUED OPERATIONS**




In
      the
      third quarter 2007, the Company resolved to discontinue all subsidiaries, other
      than FiberGel.




Pursuant
      to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets,” the accompanying consolidated financial statements have been
      reclassified to reflect the discontinued business. Accordingly, the revenues,
      costs and expenses, assets and liabilities, and cash flows of the discontinued
      business have been segregated in the consolidated statements of operations,
      consolidated balance sheet and consolidated cash flows. The net operating
      results, net assets and net cash flows of this business have been reported
      as
“Discontinued Operations.”




Following
      is summarized financial information for the discontinued
      operations:




**Nine
                  months ended****September
                  30,****2007**
              
              
              2006REVENUES:
              
              **$**
              **224,244**
              
              
              $
              360,333INCOME
                  FROM DISCONTINUED OPERATIONS(NET
                  OF TAX OF $0)(a)
              
              **$**
              **12,285**
              
              
              $
              10,829NET
                  ASSETS OF DISCONTINUED OPERATIONSCurrent
                  AssetsCash
              
              **$**
              **67,892**
              
              
              $
              24,410Accounts
                  receivable
              
              ****
              **4,064**
              
              
              
              64,179Inventory
              
              ****
              **-**
              
              
              
              9,742Net
                  other assets
              
              ****
              **18**
              
              
              
              165Current
                  LiabilitiesAccounts
                  payable
              
              ****
              **-**
              
              
              
              (95,484
              )Net
                  assets of discontinued operations(b)
              
              **$**
              **71,974**
              
              
              $
              3,012(a)
                  No gain or
                  loss on disposal of discontinued operations was recognized for
                  the nine
                  months ended September 30, 2007 and 2006.(b)
                  All assets
                  and liabilities of discontinued operations are current.






Summarized
      cash flow information for the discontinued operations is as
      follows:




**Nine
                  months ended****September
                  30,****2007**
              
              
              2006Net
                  cash used by operating activites ofdiscontinued
                  operations
              
              **$**
              **(27,493**
              **)**
              
              $
              (14,665
              )NET
                  CASH USED BY DISCONTINUEDOPERATIONS
              
              **$**
              **(27,493**
              **)**
              
              $
              (14,665
              )The
                  discontinued opertations did not provide or use any cash in investing
                  or
                  financing activities for the nine months ended September 30, 2007
                  and
                  2006.






F-15




**Z
          TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
          TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      19 – SEGMENT INFORMATION**




The
      Company evaluates its reporting segments in accordance with SFAS No. 131,
      Disclosures about Segments of an Enterprise and Related Information. The Chief
      Executive Officer has been identified as the Chief Operating Decision Maker
      as
      defined by SFAS No. 131. The Chief Executive Officer allocates resources to
      each
      segment based on their business prospects, competitive factors, net sales and
      operating results.




The
      Company’s structure includes three principal operating segments: (i) Food
      Product Development, (ii) Security Training and Products and (iii)
      E-tailer.  The food product development segment owns the exclusive,
      worldwide license to Z Trim(TM).  The Security training offers cost
      effective self-defense training courses and products with a uniquely targeted
      curriculum.  The e-tailer segment is a distributor of pillows,
      blankets, and other bedding products.  In third quarter of 2007, the
      Company resolved to discontinue all subsidiaries, other than Fiber-Gel. As
      a
      result, the security training and products segment and e-tailer segment are
      reclassified to discontinued operations and the food product development segment
      remains as the Company’s reportable segment The Company also has other
      subsidiaries that do not meet the quantitative thresholds of a reportable
      segment.




The
      Company reviews the operating segments’ income to evaluate performance and to
      allocate resources. Operating companies' income for the reportable segments
      excludes income taxes, minority interest and amortization of goodwill. Provision
      for income taxes is centrally managed at the corporate level and, accordingly,
      such items are not presented by segment. The segments' accounting policies
      are
      the same as those described in the summary of significant accounting
      policies.




Intersegment
      transactions are recorded at cost.






F-16






**Z
          TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
          TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      19 – SEGMENT INFORMATION (CONTINUED)**




Summarized
      financial information of the Company’s results by operating segment is as
      follows:




**Three
                  months ended**
                  **September
                    30,**
              
              
              **Nine
                  months ended**
                  **September
                    30,****2007**
              
              
              2006
              
              
              **2007**
              
              
              2006Net
                  Revenue:Food
                  Product Development
              
              **$**
              **113,974**
              
              
              $
              41,051
              
              
              **$**
              **544,264**
              
              
              $
              76,434Net
                  Revenue by  Reportable Segment
              
              **$**
              **113,974**
              
              
              $
              41,051
              
              
              **$**
              **544,264**
              
              
              $
              76,434All
                  Other Operating Revenue
              
              ****
              **-**
              
              
              
              196
              
              
              ****
              **49**
              
              
              
              588Consolidated
                  Net Revenue
              
              **$**
              **113,974**
              
              
              $
              41,247
              
              
              **$**
              **544,313**
              
              
              $
              77,022Operating
                  Income (Loss):Food
                  Product Development
              
              **$**
              **(1,174,853**
              **)**
              
              $
              (848,167
              )
              
              **$**
              **(2,916,531**
              **)**
              
              $
              (2,146,013
              )Operating
                  Loss by  Reportable Segment
              
              **$**
              **(1,174,853**
              **)**
              
              $
              (848,167
              )
              
              **$**
              **(2,916,531**
              **)**
              
              $
              (2,146,013
              )All
                  Other Operating Loss
              
              ****
              **(3,003,238**
              **)**
              
              
              (8,158,755
              )
              
              ****
              **(7,935,548**
              **)**
              
              
              (11,840,832
              )Consolidated
                  Operating Loss
              
              **$**
              **(4,178,091**
              **)**
              
              $
              (9,006,922
              )
              
              **$**
              **(10,852,079**
              **)**
              
              $
              (13,986,845
              )Net
                  Loss:Food
                  Product Development
              
              **$**
              **(1,174,912**
              **)**
              
              $
              (848,170
              )
              
              **$**
              **(2,916,820**
              **)**
              
              $
              (2,150,777
              )Net
                  Loss by  Reportable Segment
              
              **$**
              **(1,174,912**
              **)**
              
              $
              (848,170
              )
              
              **$**
              **(2,916,820**
              **)**
              
              $
              (2,150,777
              )All
                  Other Net Loss
              
              ****
              **(2,908,148**
              **)**
              
              
              (8,117,532
              )
              
              ****
              **(7,571,243**
              **)**
              
              
              (11,733,471
              )Consolidated
                  Net Loss fromContinuing
                  Operations
              
              **$**
              **(4,083,060**
              **)**
              
              $
              (8,965,702
              )
              
              **$**
              **(10,488,063**
              **)**
              
              $
              (13,884,248
              )Net (Loss)
                  Income from DiscontinuedOperationsPersonal
                  Safety Training and Products
              
              **$**
              **(545**
              **)**
              
              $
              139
              
              
              **$**
              **(1,527**
              **)**
              
              $
              3,895E-tailer
              
              ****
              **325**
              
              
              
              (2,938
              )
              
              ****
              **13,812**
              
              
              
              6,934Net
                  (Loss) Income fromDiscontinued
                  Operations
              
              **$**
              **(220**
              **)**
              
              $
              (2,799
              )
              
              **$**
              **12,285**
              
              
              $
              10,829Consolidated
                  Net Loss
              
              **$**
              **(4,083,280**
              **)**
              
              $
              (8,968,501
              )
              
              **$**
              **(10,475,778**
              **)**
              
              $
              (13,873,419
              )






September
                  30,Total
                  Assets:
              
              **2007**
              
              
              2006Food
                  Product Development
              
              **$**
              **6,695,037**
              
              
              $
              5,964,060All
                  other segments
              
              ****
              **4,864,964**
              
              
              
              2,788,456****
              **11,560,001**
              
              
              
              8,752,516Discontinued
                  Operations:Personal
                  Safety Training and Products
              
              ****
              **10**
              
              
              
              980E-tailer
              
              ****
              **71,964**
              
              
              
              2,032****
              **71,974**
              
              
              
              3,012Consolidated
                  assets
              
              **$**
              **11,631,975**
              
              
              $
              8,755,528






F-17